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The Production Game 1

The Production Game 1. Players: Principal, agent The Order of Play: The principal offers a wage rate, w The agent decides whether to accept of reject the contract. If the agent accepts, he has to decide on effort, e Output equals q ( e ), with q‘> 0 Payoffs:

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The Production Game 1

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  1. The Production Game 1 • Players: Principal, agent • The Order of Play: • The principal offers a wage rate, w • The agent decides whether to accept of reject the contract. • If the agent accepts, he has to decide on effort, e • Output equals q (e), with q‘> 0 • Payoffs: • If the agents rejects agent = U and principal = 0 • If the agents accepts agent = U (e,w) and principal = V (q-w)

  2. The Production Game 2:Full information. Agent moves first • In this version, every move is common knowledge and the contract is a function w(e). • The Order of Play: • The agent offers the principal a contract w(e). • The principal decides whether to accept of reject the contract. • If the principal accepts, the agent exerts effort e. • Output equals q (e), where q‘> 0

  3. The Broadway Game 1 • Players: Producer and Investors • The Order of Play: • The investors offer a wage contract w(q) as a function of revenue q. • The producer accepts or rejects the contract. • The producer chooses Embezzle or Do not embezzle. • Nature picks the state of the world to be Success or Failure with equal probability.

  4. The Broadway Game 1 • Payoffs: The producer is risk averse and the investor is risk neutral. The producer’s payoff is U(100) if he rejects the contract, where U’ > 0 and U’’ < 0, and the investors’ payoff is 0. Otherwise: producer = U(w(q)+50) if he embezzles producer = U(w(q)) if he is honest investors = q-w(q)

  5. The Broadway Game 1 • Profits in Broadway Game: • Probabilities of profits in Broadway Game: Table 7.2 and 7.3 from Rasmussen, E. (2001): Games & Information. Blackwell, Malden. 3rd Edition

  6. The Lucky Executive Game • Players: A corporation and an executive • The Order of Play: • The corporation offers the executive a contract which pays w(q)>= 0 depending on profit, q. • The executive accepts the contract, or rejects it and receives his reservation utility of U = 5. • The executive exerts effort e of either 0 or 10. • Nature chooses profit (see next slide).

  7. The Lucky Executive Game • Payoffs: Both players are risk neutral. The corporation’s payoff is q – w. The executive’s payoff is w – e if he accepts the contract. • Table of outputs: Table 8.1 from Rasmussen, E. (2001): Games & Information. Blackwell, Malden. 3rd Edition

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