Case Western Reserve University

Department of Economics
ECON 329 - Game Theory
Spring 2015

Homework #4
Lectures 14 & 15
Return in Class on Thursday March 26th
Name:

Total points ____ out of 20.

1. Simple Dynamic Game (6 points).
Player 1
L

R
Player 2

Player 2
A

Player 1

Player 1
1, 0

31, 9

D
Player 2

21, 10

12, 20

21, 9

10, 10

D
20, 0

a) How many subgames are in this game (without the original game)? (2 points).

b) What are the SPNE of the game? (4 points).

2. Ultimatum bargaining game with two players (10 points).

Consider an ultimatum bargaining game with two players, Row and Column, and three possible contracts, A, B,
and Z. The rules of bargaining allow Row to propose one of the three contracts, which Column must then either
accept (A) or reject (R). If Column accepts Rows proposal, then Rows proposal determines the outcome. If
Column rejects it, then both get 0. Row's payoffs from proposing A, B, Z, are 1, 2, and 3, assuming that Colum
has accepted the contract. Column's payoffs are 2, 1, -1, respectively. If Colum rejects the contract the payoffs
are 0 for both.

a) Write down the Normal-form representation of the game as a matrix and find all Nash equilibria of this game
(5 points).

b) Find all SPNE of this game (5 points).

3. Three-Player Trust Game (4 points). In the class you participated in a centipede game that is sometimes
called a trust game. The trust game has been extensively used to study trust and reciprocity.
a) Do you think that making a promise and then breaking it has any impact on trust? (2 points). Hint: To answer
this question, please read the article Building and Rebuilding Trust with Promises and Apologies which was
published in the Journal of Economic Behavior and Organization
http://www.sciencedirect.com/science/article/pii/S0167268112001771. If you are off campus, you may not have
a direct access to the journal, so here is the link to an open access version:
http://ideas.repec.org/p/chu/wpaper/12-19.html.

b) Do you think that allowing parties to communicate has any impact on trust? (2 points). Hint: To answer this
question, please read the article Three-Player Trust Game with Insider Communication which was published
in Economic Inquiry http://onlinelibrary.wiley.com/doi/10.1111/ecin.12018/abstract. If you are off campus, you
may not have a direct access to the journal, so here is the link to an open access version:
http://ideas.repec.org/p/pra/mprapa/43533.html.