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In game theory and economics, a mechanism is called incentive-compatible (IC) [1]: 415 if every participant can achieve their own best outcome by reporting their true preferences. [ 1 ] : 225 [ 2 ] For example, there is incentive compatibility if high-risk clients are better off in identifying themselves as high-risk to insurance firms , who ...
If a strictly dominant strategy exists for one player in a game, that player will play that strategy in each of the game's Nash equilibria. If both players have a strictly dominant strategy, the game has only one unique Nash equilibrium, referred to as a "dominant strategy equilibrium".
In game theory terms, the players of this game are a leader and a follower and they compete on quantity. The Stackelberg leader is sometimes referred to as the Market Leader. There are some further constraints upon the sustaining of a Stackelberg equilibrium. The leader must know ex ante that the follower observes its action. The follower must ...
This game is a common demonstration in game theory classes. It reveals the significant heterogeneity of behaviour. [11] It is unlikely that many people will play rationally according to the Nash equilibrium. This is because the game has no strictly dominant strategy, so it requires players to consider what others will do.
The dictator game is a popular experimental instrument in social psychology and economics, [1] a derivative of the ultimatum game. The term "game" is a misnomer because it captures a decision by a single player: to send money to another or not. [2] Thus, the dictator has the most power and holds the preferred position in this “game.”
A prototypical paper on game theory in economics begins by presenting a game that is an abstraction of a particular economic situation. One or more solution concepts are chosen, and the author demonstrates which strategy sets in the presented game are equilibria of the appropriate type.
A social choice rule is dominant strategy incentive compatible, or strategy-proof, if the associated revelation mechanism has the property that honestly reporting the truth is always a dominant strategy for each agent." [2] However, the payments to agents become large, sacrificing budget neutrality to incentive compatibility.
Formally, a stag hunt is a game with two pure strategy Nash equilibria—one that is risk dominant and another that is payoff dominant. The payoff matrix in Figure 1 illustrates a generic stag hunt, where > >. In addition to the pure strategy Nash equilibria there is one mixed strategy Nash equilibrium. This equilibrium depends on the payoffs ...