Chapter-4 Game Theory in Law & Economics - SSRN papers

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... Games People Play: The Basic Handbook of Transactional Analysis, New York, Ballantine ..... In Law I, the motorists have no liability for the injury to patients.
Introduction to Law & Economics

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Chapter-4 Game Theory in Law & Economics 1.

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Games People Play : Understanding Strategic Behavior

Case 1: Two friends, toppers and competitors, Amay & John plan to share their notes for the forthcoming Economics exam. Amay attended first half of the lectures and John attended second half of them, due to which neither of them have complete lecture notes. They both know if they fairly share all their notes with one other, both will get highest grades (of course subject to the condition that they study the notes well). However, if Amay shares some of the notes, while John shares all; then Amay will have an advantage and will top the exams. Likewise, if John shares some, while Amay shares all; then John will score better. However, if they mutually choose not to share, then they both will fail the exam. ‘10’ is the highest score one can get in the exam and ‘0’ the lowest. ‘7’ is the score when one chooses to co-operate whereas the other has not co-operated. For instance if Amay co-operates, but John does not, then Amay scores ‘7’, whereas John tops with a full score of ‘10’. This choice of alternatives/ strategies available to the two friends can be represented in the form of following 2*2 matrix.

John Co-operate

Don’t Co-operate 10

10

Co-operate 10

Amay

7 7

0

Don’t Co-operate 10

0

Not knowing how the other is going to behave, they are in a dilemma and since, the most dominant strategy for them is ‘not to cooperate’ they may end up not co-operating at all. Even though, ‘non-cooperation’ is not the best and most efficient strategy in the given case; nonetheless, considering the lack of information, it is the most probable strategy. Understanding this behavior in multi-person(two or more person) setting is an intricate art & science. In the field of economics, it is called Game Theory. Game Theory may be defined as the study of mathematical models of conflict and co2 operation between intelligent and rational decision-makers. Myerson suggests ‘conflict 1. 2.

The title has been taken from the best selling book on human psychology by Eric Berne. Eric Berne, Games People Play: The Basic Handbook of Transactional Analysis, New York, Ballantine Books, (1964). Myerson Roger B, Game Theory: Analysis of Conflict, Harvard University Press(1991).

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FIRST PROOF

Electronic copy available at: http://ssrn.com/abstract=2330260

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Hariomtatsatram

analysis’ or ‘interactive decision theory’ as a more appropriate name for the Game Theory considering the fact that it analyses how individuals make decisions when conflicted with such a situation. 2.

VNM Rational Agent and its Axioms

Game theory was invented by John von Neumann and Oskar Morgenstern in the year 3 1944. According to Neumann & Morgenstern, an agent satisfying the four axioms of ‘rationality’ that is ‘completeness’, ‘transitivity’, ‘continuity’ and ‘independence’ has a utility function and such an individual is a VNM rational agent. These axioms were defined as: Axiom 1 Completeness assumes that an individual has well defined preferences. For any lotteries L, M; one of the following must hold: L