1. Games & Politics
Evgeniya Lukinova

2. Week 7 Agenda Collective Action, review
Institutions, Principals and Agents
Bargaining, Ultimatum Game
Agenda Setting

3. Collective Action (review)

4. Collective Action
Responses to regularly recurring problems are often institutionalized
Institutions play a role of repository of authority and repository resources to solve such problems

5. An Efficient Institution
Division of labor
Procedural regularity
Specializing labor
Delegation and Monitoring

6. Legislature Legislators: delegates or trusteers?
Heterogeneous preferences

7. Bureaucracy
Bureaucracy is the social institution through which publicly provided services are publicly produced
The alternative to bureaucratic supply of public service is the purchase of such services from private firms
Firms vs. Bureaus?

8. Bureaucracy
Bureaucracy is the social institution through which publicly provided services are publicly produced
The alternative to bureaucratic supply of public service is the purchase of such services from private firms
Firms vs. Bureaus?
The lack of competition among public bureaus
The lack of profit incentive (public service are not sold for a price)

9. Bureaucracy
Bureau or department of government as a division of a private firm and a bureaucrat as a manager who runs that division
Bureau chief is a maximizer of his budget
Own compensation depend on the size of the budget
Nonmaterial personal gratification
Care about his mission

10. Niskanen Model
It doesn’t matter why a bureaucrat is interested in a big budget! What matters is that she wants more resources rather than less!
Chief of bureau – budget maximizer
Legislature appropriates the budget depending on bureau’s output
Willingness-to-pay curve (B for “budget”) is increasing at a decreasing rate
Bureaucracy must institute a production process
Costs of production (TC for “total cost”), diminishing returns to scale

11. Niskanen Model
The objective of budget maximization combined with the position of most bureaus as monopoly suppliers of some public services will result in excessive supply of such services.
Variations
Motive “on-the-job consumption” -> camouflage costs of production -> socially optimal level of production -> bureaus are not too large, but they are too expensive
Motive “the quiet life” -> tendency to underproduce

12. Principals and Agents We retain agents to act in our interest
Agents possess knowledge and skills to be more effective in doing smth than if we do it ourselves
Each of us is a principal
Problem: how to control our agents?

13. Principals and Agents We retain agents to act in our interest
Agents possess knowledge and skills to be more effective in doing smth than if we do it ourselves
Each of us is a principal
Problem: how to control our agents?
Reputation of an agent
Payment contingent on completion of tasks

14. Principals and agents Experiment Session: uogt12
veconlab.econ.virginia.edu/login.php
The employer begins by making a contract offer
The worker sees the contract and decides whether to accept or reject
A rejection results in zero earnings for each party
The worker chooses an effort level, which must be low (0) or high (1).
Treatment 1: trust
Treatment 2: The employer sees the worker effort and decides on a bonus payment or penalty.

15. Ultimatum game
The first player proposes how to divide the sum between the two players
The second player can either accept or reject this proposal
If the second player rejects, neither player receives anything
If the second player accepts, the money is split according to the proposal.

16. Ultimatum Game
Extensive form representation of a two proposal ultimatum game. Player 1 can offer a fair (F) or unfair (U) proposal; player 2 can accept (A) or reject (R).

17. What do game theorists say?
Ariel Rubenstein (1982)
showed that there exist a unique equilibrium solution to this problem
Rational solution: predicting that proposer should offer the smallest possible share and responder would accept it.

18. Experimental data is inconsistent
Güth, Schmittberger, Schwarze (1983)
They did the first experimental study on this game.
The mean offer was 37% of the “pie”
Since then several other studies has been conducted to examine this gap between experiment and theory.
Almost all show that humans disregard the rational solution in favor of some notion of fairness.
The average offers are in the region of 40-50% of the pie
About half of the responders reject offers below 30%

19. Sequential bargaining experiment
δ=.5
T=?
If agreement is not reached after T=? rounds of bargaining, the pie vanishes.
The game stops if all offers are accepted.

20. Discount Factor Meaning of the discount factor δ ∈ [0, 1)
Impatience of players who value future utility less than today’s utility.
Interest rate (δ =1/(1+r)): Having two dollars today or two dollars tomorrow makes a difference to you: your two dollars today are worth more, because you can take them to the bank and get 2 (1 + r) dollars tomorrow where r is the interest rate.
Probabilistic end of game: suppose the game is really finite, but that the end of the game is not deterministic. Instead given that stage t (time period) is reached there is probability that the game continues (δ) and probability that the game ends after this stage (1- δ).

21. Sequential bargaining experiment T=1
Player 1 starts with a pie of tokens and decides on what to keep and offer to Player 2
Player 1 writes down the offer and shows it to Player2
Player 2 can either Accept or Reject the offer. Make your decision

22. Sequential bargaining experiment T=2, if in T=1 - rejection
Player 2 starts with a pie of tokens and decides on what to keep and offer to Player 1
Player 2 writes down the offer (y) and shows it to Player 1
Player 1 can either Accept or Reject the offer, but this time both of the players will get discounted payoffs,
i.e. y x δ or (10000-y)x δ
Make your decision

23. Sequential bargaining experiment T=3, if in T=2 - rejection
Player 1 starts with a pie of tokens and decides on what to keep and offer to Player 2
Player 1 writes down the offer (z) and shows it to Player 2
Player 2 can either Accept or Reject the offer, but both of the players will get discounted payoffs,
i.e. y x δ x δ or (10000-y)x δ x δ
Make your decision

24. Sequential bargaining experiment T=4, if in T=3 - rejection
Player 1 starts with a pie of tokens and decides on what to keep and offer to Player 2
Player 1 writes down the offer (z) and shows it to Player 2
Player 2 can either Accept or Reject the offer, but both of the players will get discounted payoffs,
i.e. y x δ x δ x δ or (10000-y)x δ x δ x δ
Make your decision

25. Sequential bargaining experiment
the game stops, and the pie vanishes

26. Discussion
Theoretical predictions are different in infinite and finite cases. Backward induction can be used in finite case and bargaining power goes to the player who is a proposer in the last round.
Do you think there is some bargaining power for any of the players in the infinite game?

27. Bargaining 2+
Coalition formation (19th century British politics)

28. Voting
Alliances between voting blocs can determine the agenda

29. Voting Alliances between voting blocs can determine the agenda But…
agreements on how to vote after agenda is set will be broken, if the partners are self-interested.

30. Example L C R
Government Contracts
Profitable
Honest

31. Example L C R G P H
Does majority rule help?

32. Example L C R G P H
Does majority rule help?
What should we do next?

33. Example: Change in Preferences
Although individual preferences are transitive, group preferences are intransitive.
What should we do?

34. Agenda setting Agenda Setter decides on the order of the vote
The first two items on agenda are voted on
Majority rule is used, the looser is eliminated
Let’s find the winners!
Agenda 1
Agenda 2
Agenda 3 H G P

35. Agenda setting Agenda 1 -> G Agenda 2 -> P Agenda 3 -> H
Agenda Setter can ensure its first-best outcome by setting the order of the two pair-wise contests
Agenda 1
Agenda 2
Agenda 3 H G P

36. Agenda Setting
Agenda Setting may also lead to a deadlock. Need a compromise!
Left votes for the Right’s agenda (getting its first- best outcome at least in second place). Demand a promise in return?
Each bloc can promise anything it wants to secure an alliance, but also free to break any promise.
Demonstration:
Secret negotiations between each pair of blocs (2 times)
Submitting a secret agenda ballot
Determing the Finalist