Game Theory
Cornell University ⋅ ECON4020 ⋅ Spring 2017- The final exam will be on Tuesday, May 16th at 14:00 in Uris Hall G01. The exam is cummulative, but it will focus on the topics we have covered since the second prelim (repeateg games, principal-agent problems, auctions, and matching). There will be a multiple choice question as in the second prelim.
course information — syllabus — grade distribution
Course Outline
Part 1 — Games and Rational Agents
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Introduction to game theory
— Watson Ch. 1
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⋅ chronology of game theory
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The Cheong Gye Cheon Restoration Project (2003–2005) removed about 7 miles of highway from
Seoul, Korea, and replaced it with a public recreation space.
According to Wikipedia, “the project sped up traffic around the city when the motorway was removed”.
- In 1986, San Francisco voters rejected an initiative to tear down the Embarcadero Freeway given the posibility that removing the freeway would cause gridlock. A major Earthquake in 1989 caused parts of the freeway to close, and there was no noticeable effect in traffic. The freeway was eventually removed in 1991. You can read more about this and other succesful highway replacement stories here.
- The Voie Georges-Pompidou along the right bank of the Seine used to be one of the busiest roads in Paris. Since September 2016, it has been temproatily closed to motor vehicles. If succesful, this trial pedestrianisation could become permanent.
- Rochester is currenty undergoing a project to replace a 60-year-old highway bypass with a boulevard and prime land for development. We still have to wait to see the effect on traffic.
This clip from the film The Princess Bride shows faulty but interesting game theoretic reasoning. Here is a good blog post about it. We will revisit the analysis in the blog post after we talk about equilibrium and perfection. -
The Cheong Gye Cheon Restoration Project (2003–2005) removed about 7 miles of highway from
Seoul, Korea, and replaced it with a public recreation space.
According to Wikipedia, “the project sped up traffic around the city when the motorway was removed”.
- Extensive form games — Watson Ch. 2 & 14 ⋅ slides ⋅ guided exercise
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Strategic form games
— Watson Ch. 3
⋅ slides
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The original game of chicken from a Rebel Without a Cause (1955): “'Hey, Toreador, she signals and we head for the edge and the first man who jumps is a chicken. All right?” - Rationality and dominance — Watson Ch. 4–6 ⋅ slides
Part 2 — Solution Concepts
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Common knowledge and rationalizability
— Watson Ch. 7 & 8
⋅ slides
⋅ Kneeland (2015)
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After Phoebee and Rachel talk with Joey, everybody knows about Monica and Chandler. There is first-order mutual knowledge, but there is no common knowledge because Monica and Chandler know that Joey knows, but think that Phoebe and Rachel do not know. There are higher orders of mutual knowledge as the video progresses. 
The logicians from Spiked Math Comics illustrate how to do inference from what other people do or do not know. Here is a follow-up from (x, why?) Comics 
If we take the median voter theorem very seriously, what does extreme political polarization imply for the volatility of elevtoral outcomes? - First problem set — due on 2/23 ⋅ assignment ⋅ answers
- First preliminary exam — 2/28 — practice ⋅ answers
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Equilibrium
— Watson Ch. 9, 10 & 11
⋅ slides
⋅ Brandenburger (1992)
⋅ Chiappori, Levitt & Groseclose (2002)
⋅ Gaurioty, Pagez & Wooders (2016)
⋅ Batzilis, Jaffe, Levitt, List & Picel (2016)
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Lisa's Brain: “Poor predictable Bart; always takes Rock.”
Bart's Brain: “Good ol' Rock, nothing beats that!”
Mixed strategies are important! -
Backward induction and perfection
— Watson Ch. 15 & 19
⋅ slides (preliminary)
⋅ play nim
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In this clip from the Dark Knight, more sophisticated agents should be able to figure out the Jocekr's intention before it is too late for them. Ponzii schemes and other greater-fool contests crucially depend on at least some agents either failing to understand backward induction, or believing that others do.
Part 3 — Moral hazard
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Pareto efficiency, moral hazard and contracts
— Watson Ch. 13
⋅ slides
⋅ Easley & Kleinberg Ch. 8, Braess Paradox
⋅ Hölmstrom (1982)
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Commitment devices can be powerful powerful tools to enforce cooperative agreements. However, as Dr. Strangelove puts it “the whole point of a Doomsday Machine is lost if you keep it a secret! Why didn't you tell the world, eh?” -
Repeated interactions
— Watson Ch. 22 & 23
⋅ slides (preliminary)
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Repeated interactions facilitates cooperation, even among selfish blodsuckers. - Second problem set — due on 3/28 ⋅ assignment ⋅ answers
- Second preliminary exam — tentative date 3/30 — practice ⋅ answers
- Principal-agent problems — Watson Ch. 24 & 25 ⋅ slides (comming soon)
Part 4 — Private Information
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Bayesian games and Auctions
— Watson Ch. 26 & 27
⋅ slides (comming soon)
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Is it a complete scam, just an all-pay auction, or both? - Mechanism design — Tadelis Ch. 14 and Ch. 13
- Matching
- Third problem set — due on 5/09 ⋅ assignment
- Final exam — 4/16 at 2:00 pm in Uris G01