Name:_______________________

SID:_________________________
Circle your GSI:

Youssef Benzarti Jeff Kang Anne Karing

Jen Kwok Anne Meng

GAME THEORY IN THE SOCIAL SCIENCES

Political Science 135/Economics 110

Final Examination

Fall 2013

INSTRUCTIONS:

This final examination is open book and open note. Answer all of the following questions.
There are 170 points which works out to one point per minute. Budget your time carefully.
Some questions are hard and others are easy. If you are stuck on a question, come back to it.
Use the blank pages if necessary, and, obviously, you should use additional paper if you need it.
Be sure to show your work and justify your answers to all questions so that you may be
given partial credit if you add 3 and 3 and get 7!! (Those who will be grading this are
especially sympathetic to those who are arithmetically challenged.)

CIRCLE ALL OF YOUR FINAL ANSWERS OR PUT A BOX AROUND THEM.

Good luck and have a good holiday vacation.

QUESTION 1 OUT OF 4
Question 1 (56 Points/56 minutes): Bargaining about Iran’s nuclear program.

The five permanent members of the UN Security Council (Britain, China, France, Russia, and
the United States) plus Germany, the so-called P5+1, are negotiating with Iran in an effort to get
Iran to agree to restrictions on its nuclear program. More specifically, the P5+1 is concerned that
Iran is trying to develop a nuclear weapon, and the United States has threatened to use force to
prevent this. Iran, by contrast, denies that it is trying to develop a nuclear weapon and says that
its nuclear program is for peaceful purposes.
In the game below, the P5+1 demands that Iran accept restrictions r on its nuclear
program where a larger r means more restrictions, e.g., more frequent and more intrusive
inspections of Iran’s nuclear facilities. Iran can agree to these restrictions or reject them and
continue with its program. The more Iran values developing a nuclear weapon, the higher the
payoff w to rejecting the P5+1 demand and continuing without restrictions.

Key: (P5+1’s payoff, Iran’s payoff)

1
(a, 8 pts) Suppose that Iran attaches no value to having a nuclear weapon, i.e., w = 0. What
is/are the subgame perfect equilibrium of the game? Does Iran accept any
restrictions in equilibrium?

(b, 16pts) Suppose that Iran attaches no value to having a nuclear weapon (w = 0) but dislikes
the idea of agreeing to any restrictions on its program. What is the lowest level of r
that Iran can get in a Nash equilibrium, and find an equilibrium strategy profile in
which Iran gets that level?

2
Suppose that the P5+1 is unsure of how much Iran values nuclear weapons. In particular, the
P5+1 believes that w is evenly (uniformly) distributed between 0 and 80.

(c, 8 pts) What is the probability that Iran agrees to an offer of r?

(d, 8 pts) What is the P5+1’s expected payoff to offering r?

(e, 12 pts) What is the subgame perfect equilibrium? (You can answer this question using
calculus or by determining which of the following offers gives the P5+1 its highest
payoff: 40, 45, 50, 55).

SEE PART F ON THE NEXT PAGE.

3
(f, 4 pts) What is the equilibrium probability that the P5+1 and Iran reach an agreement?

4
 Name:_______________________
SID:_________________________
Circle your GSI:

Youssef Benzarti Jeff Kang Anne Karing

Jen Kwok Anne Meng

GAME THEORY IN THE SOCIAL SCIENCES

Political Science 135/Economics 110

Final Examination

Fall 2013

INSTRUCTIONS:

This final examination is open book and open note. Answer all of the following questions.
There are 170 points which works out to one point per minute. Budget your time carefully.
Some questions are hard and others are easy. If you are stuck on a question, come back to it.
Use the blank pages if necessary, and, obviously, you should use additional paper if you need it.
Be sure to show your work and justify your answers to all questions so that you may be
given partial credit if you add 3 and 3 and get 7!! (Those who will be grading this are
especially sympathetic to those who are arithmetically challenged.)

CIRCLE ALL OF YOUR FINAL ANSWERS OR PUT A BOX AROUND THEM.

Good luck and have a good holiday vacation.

QUESTION 2 OUT OF 4
Questions 2 (48 points/48 minutes): Detonating the “nuclear option” and ending the filibuster in the
U.S. Senate.

The U.S. Senate operates according to what some observers see as arcane rules. One of them is the
filibuster. The filibuster effectively means that any legislation or Presidential appointment must get a
supermajority of 60 votes to pass rather than just a simple majority of 51 or more of the 100
senators.
Over the years, each party has used the filibuster to prevent the other party from appointing
judges whose views were “out of the mainstream.” When the Republicans controlled the Senate,
Democrats used the filibuster to prevent a Republican President from appointing judges with
extremely conservative views. When the Democrats controlled the Senate, Republicans used the
filibuster to prevent a Democratic President from appointing judges with extremely liberal views.
Both parties have increased their use of the filibuster in recent years, and each party has
complained about the other’s “excessive” use. Matters finally came to a head last month when the
Democrats used the “nuclear” option and did away with the filibuster by changing the Senate
Rules. In principle either party can change the rules back to reinstate the filibuster, but no one
thinks this will happen.
The game below captures some aspects of the fight over the filibuster. The Democrats, D,
win control of the Senate with probability .6 and the Republicans gain control with probability .4.
The party in control then decides whether to allow filibusters or not. Allowing filibusters results in
more moderate judges and yields a payoff of 10 to each party. Not allowing the filibuster means
that the party in control can get more extreme judges. The Democrats get L when they appoint very
liberal judges, and the Republicans get C when they appoint very conservative judges. Each party
gets -20 when the other party appoints extreme judges.

1
In (a)-(d), assume C = L = 20.

(a, 10 pts) What is the strategic form of this game?

Now suppose that the game is played repeated infinitely many times with discount factor  = 4/5,
and consider the following strategies:

R: - play “allow” if in control in round 1

- play “allow” whenever in control as long as D has always played “allow” when in
control; otherwise play “no filibuster” forever.

D: - play “allow” if in control in round 1

- play “allow” whenever in control as long as R has always played “allow” when R in
control; otherwise play “no filibuster” forever.

(b, 6 pts) A party’s incentives not to have a filibuster are greatest when it is in charge of the
Senate and therefore can get the kind of judge it favors. What does D get in the first
round if it controls the Senate and decides not to allow filibusters?

2
THIS PAGE IS BLANK.

3
(c, 16 pts) Are the strategies above a Nash equilibrium of the repeated game? Be sure to justify
your answer.

(d, 8 pts) How patient must the players be in order for the above strategies to be Nash, i.e., for
what values of  are the strategies Nash?

4
(e, 8 pts) Some commentators say that the reason why the Democrats did away with the filibuster
last month is that the Democrats believe that the Tea Party faction in the Republican
Party has become very influential and that Republican Party under this influence would
do away with the filibuster as soon as it returns to power. Suppose that R’s payoff to
appointing conservative judges rises to C = 40 because of Tea Party influence. Are the
strategies above Nash (assume  = 4/5)?

5
 Name:_______________________
SID:_________________________
Circle your GSI:

Youssef Benzarti Jeff Kang Anne Karing

Jen Kwok Anne Meng

GAME THEORY IN THE SOCIAL SCIENCES

Political Science 135/Economics 110

QUESTION 3 OUT OF 4

Final Examination

Fall 2013

INSTRUCTIONS:

This final examination is open book and open note. Answer all of the following questions.
There are 170 points which works out to one point per minute. Budget your time carefully.
Some questions are hard and others are easy. If you are stuck on a question, come back to it.
Use the blank pages if necessary, and, obviously, you should use additional paper if you need it.
Be sure to show your work and justify your answers to all questions so that you may be
given partial credit if you add 3 and 3 and get 7!! (Those who will be grading this are
especially sympathetic to those who are arithmetically challenged.)

CIRCLE ALL OF YOUR FINAL ANSWERS OR PUT A BOX AROUND THEM.

Good luck and have a good holiday vacation.

Question 3 (24 Points/24 minutes): Inducing effort.

Incentivize is a manufacturing firm facing an uncertain economy. Its revenues will either be high,
180, or low, 60. If Incentivize’s employee, E, works hard, the probability of high revenues is ¾; if
E slacks off, the probability of high revenues is only ¼. Incentivize has to decide how much to
offer in wages, w, and in performance bonuses, b.
Wages are paid whether revenues are high or low; bonuses are paid only if revenues are
high. E can decide to quit, slack off, or work hard. The disutility to slacking off (relative to quitting
and going to the beach) is -20 and the disutility to working hard -40. If E quits, Incentivize and E
both get 0. Assume w  0 and b  0 .

Key: (Incentivize’s payoff, E’s payoff)

1
(a, 8 pts) Suppose state regulations or union contracts prevent Incentivize from using
performance bonuses, i.e., b must be 0. What is the subgame perfect equilibrium? What is the
equilibrium wage, what does E do in equilibrium, and what are Incentivize’s expected profits?

(b, 12 pts) Suppose that Incentivize is allowed to use bonuses. Find a subgame perfect equilibrium.
What is the equilibrium wage and bonus, what does E do in equilibrium, and what are Incentivize’s
expected profits?

PART C IS ON THE BACK OF THE PAGE.

2
(c, 4 pts) Is Incentivize better off if it can offer bonuses and, if so, by how much?

3
 Name:_______________________
SID:_________________________
Circle your GSI:

Youssef Benzarti Jeff Kang Anne Karing

Jen Kwok Anne Meng

GAME THEORY IN THE SOCIAL SCIENCES

Political Science 135/Economics 110

Final Examination

Fall 2013

INSTRUCTIONS:

This final examination is open book and open note. Answer all of the following questions.
There are 170 points which works out to one point per minute. Budget your time carefully.
Some questions are hard and others are easy. If you are stuck on a question, come back to it.
Use the blank pages if necessary, and, obviously, you should use additional paper if you need it.
Be sure to show your work and justify your answers to all questions so that you may be
given partial credit if you add 3 and 3 and get 7!! (Those who will be grading this are
especially sympathetic to those who are arithmetically challenged.)

CIRCLE ALL OF YOUR FINAL ANSWERS OR PUT A BOX AROUND THEM.

Good luck and have a good holiday vacation.

QUESTION 4 OUT OF 4
Question 4 (42 Points/42 minutes): Campaign War Chests.

A potential challenger is deciding whether to challenge the current incumbent in the party’s
primary election. This is a “safe” congressional district, so that winner of the primary is virtually
certain to win the general election in November 2014. The challenger wants to mount a challenge
if the incumbent is weak and likely to lose. If the incumbent is strong and likely to win the
primary, the challenger does not want to take the incumbent on. The challenger is looking for
signals about how strong the incumbent is. One of these may be the size of the incumbent’s war
chest, i.e., the amount of money the incumbent has raised for its campaign. Raising money is
distasteful and costly for the incumbent, but less so if the incumbent is strong.
In the signaling game below, the incumbent has to decide whether to raise a large war
chest or a small war chest. The challenger, C, then decides whether to enter the primary or not.
The challenger initially believes that the incumbent is strong, S, with probability ¼ and weak, W,
with probability ¾. The additional cost of raising a large war chest rather than a small one is c
for the weak incumbent and c/2 for the strong incumbent where c  0 . Another copy of the
game is on page 3of this problem.

Key: (Incumbent’s payoff, Challenger’s payoff)

1
In answering the questions below, consider only pure-strategy equilibria and disregard any
possible mixed-strategy equilibria.

(a, 8 pts) Assume c = 40. Suppose that C expects the types of incumbent to separate with W
raising a large war chest and S raising a small war chest. What would C infer about
the incumbent’s type if it raises a large war chest and why would it make that
inference?

(b, 8 pts) A separating equilibrium will exist if the cost of raising a large war chest c is neither
too high nor too low. Find the range of possible values of c for which any separating
equilibrium exists. What is/are the separating equilibria for values of c in this range?

2
Key: (Incumbent’s payoff, Challenger’s payoff)

3
Assume c = 25 for parts (c)-(e).

(c, 8 pts) Find a pooling perfect Bayesian equilibrium in which W and S raise small war chests.

(d, 6 pts) Does the equilibrium you found in (c) pass the intuitive criterion? Be sure to justify
your answer.

4
(e, 12 pts) Do any of the Perfect Bayesian equilibria in which W and S pool on small pass the
intuitive criterion? If so, which ones do? If not, explain why none do.