Economics is all about incentives: in any situation, certain behavior will turn out well, and other behavior won’t. Sometimes this is shaped by brute natural facts and other times it depends on what others are doing. Either way, you employ a strategy to do the best you can in that situation.
Game theory is the study of strategies. And institutions are both ways to shape strategies, as well as strategies themselves in a broader game. We will be thinking rigorously about incentives to answer questions from moral philosophy, politics, finance, business, zoology, microbiology, history, poetry, and – of course – economics:
- How does firm behavior change in a noncompetitive environment?
- Why don’t cartels usually work?
- Why do people care about what others think about them?
- When might it be ‘rational’ to act irrationally?
- Why do birds sing so beautifully and have such bright colors?
- Why is cancer so hard to beat?
- How do we make sure that people with the authority to punish bad behavior, don’t behave badly themselves?
The class is organized by game rather than by technique. As an undergraduate course for students who will likely not pursue graduate economics, it is as non-technical as the material allows, and designed to give students a library of games that they understand deeply and can use to analyze real-world scenarios throughout life. It is divided into seven units:
- Basic Concepts
Normal and extensive forms, backwards induction, Nash equilibria, social dilemmas
- Pure and Mixed Strategies
Dominant strategies, Hawk-Dove and Matching Pennies games, subgame perfection
- Coordination and Equilibrium Selection
Schelling points, risk and payoff dominance, lock-in, correlated equilibrium
- Repeated Games
Discounting, finite automata, the folk theorem, the Axelrod tournament
- Altruism and Reciprocity
Evolutionary game theory, direct and indirect reciprocity, kin and multi-level selection, costly punishment
- Signaling
Bayes’ rule, pooling & separating equilibria, adverse selection, the handicap principle, Goodhart’s law
- Mechanism Design
Incentive-compatibility, moral hazard, organizational economics, voting systems, political philosophy
