API 303Game Theory and Strategic Decisions

Course Syllabus

Spring 2012

Faculty Pnar Dogan Faculty Assistant Katie Naevepinar_dogan@hks.harvard.edu katie_naeve@hks.harvard.eduO ce: L-215 Phone: 617 496 6757 O ce: L-349 Phone: 617 495 8833

Teaching Fellow Alexandra Van Geen Course Assistant Katie Frostalexandra_van_geen@hksphd.harvard.edu katie_frost@hks12.harvard.edu

Weekly Schedule

Lecture Review Section O ce Hours*Tuesday 10:10 - 11:30 a.m. Land tbaThursday 10:10 - 11:30 a.m. LandFriday 10:10 - 11:30 a.m. Land

*Please sign up on the sheet outside my o ce door. If you are unable to attend my o ce hours or theyare full, please contact me for a di erent time.

Course Description This course uses game theory to study incentives and strategic behavior inpractical situations of inter-dependent decision making and negotiations. The course will developbasic theoretical concepts in tandem with applications from a variety of areas, including bargaining,competition, and strategic voting.

Prerequisites No formal prerequisites. The course is designed to be accessible to all KennedySchool students, regardless of mathematical background. The lectures emphasize conceptual ratherthan technical material, however, additional technical material will be provided as optional readings.

Grading Grades for the course will be assigned based on

Problem sets 20%Group assignment 30%Final exam (in class) 50%

Main Textbook

�— Avinash Dixit, Susan Skeath, and David H. Reiley, Jr., Games of Strategy, 3rd Edition,Norton, 2009.

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Recommended Books We will read from three other books, which you might consider purchas-ing. They are also available on reserve in the HKS Library.

�— Avinash K. Dixit and Barry J. Nalebu , The Art of Strategy, Norton, 2008.

�— David Kreps, Game Theory and Economic Modeling, Oxford/Clarendon, 1990.

�— Thomas Schelling, Micromotives and Macrobehavior, Norton, 1978 (Rev Ed 2006).

Other Books

�— Roy Gardner, Games for Business and Economics, Wiley, 1995.

�— John McMillan, Games, Strategies, and Managers, Oxford University Press, 1996.

�— Howard Rai a, The Art and Science of Negotiation, Harvard University Press, 1982.

�— Thomas Schelling, The Strategy of Conict, Harvard University Press, 1960 (Reprinted1980).

Readings Textbook readings are marked with a [T]. These readings are optional, but recom-mended if you are nding the conceptual or theoretical material for a given class especially chal-lenging. Required readings are marked as [R]. Remaining readings are recommended. Supplementalreadings will almost always be available online for free through the Harvard library system or inbooks reserved in the library. One way to reach articles published in both academic journals andnewspapers is through the Harvard Library/Google Scholar interface. Use the following link to ac-cess the system: http://scholar. google.com.ezp1.harvard.edu/ You will be prompted to enter yourHarvard ID and library PIN. Search for the article using keywords, and use the �“Find It@Harvard�”link to access the electronic version of the paper.

Group Assignment The group assignment will require you to apply game theoretical conceptsto an area of your special interest, e.g. business, politics, or society, and write a 2-3 page essay.You will also be asked to make a short presentation of the issue you chose and of your analysisduring class. The group assignment will count for 30% of the grade. Each group member willanonymously rate the contribution of his/her group members for the assignment, which will beused as an input for each student�’s grading. Attendance is required for all students duringthe week of student presentations (Tuesday, April 17 and Thursday, April 29).

Problem Sets There will be eight short problem sets, which will be graded. Problem sets countas 20% of the grade (2.5% each). Small groups of students�—no more than four�—are encouraged towork together on the problem sets. Problem solutions must be written independently by each ofthe students in the small group, and must indicate the name of the students in the group. Allproblem sets are due at class time. Answers to the problem sets will be posted on the class website shortly after they are turned in. Problem sets turned in after the class time on the duedate will not receive any credit.

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Important dates :

Shopping Day Thursday, January 19First class Tuesday, January 24Group assignment essays due Tuesday, April 10Presentation of group assignments Tuesday, April 17 and Thursday, April 19Last class Thursday, April 26Final exam (in class, 9:00-noon) Thursday, May 3

Problem set due dates :

Problem set 1 Tuesday, January 31Problem set 2 Tuesday, February 7Problem set 3 Tuesday, February 14Problem set 4 Tuesday, February 21Problem set 5 Tuesday, February 28Problem set 6 Tuesday, March 6Problem set 7 Tuesday, March20Problem set 8 Tuesday, April 3

Detailed Schedule and Readings (Tentative)

DSR: Dixit, Skeath and Reiley (2009)

Tuesday, January 24: Introduction and Foundations of Game The-ory

[T] DSR, Chapters 1 and 2.

[T] Kreps, Chapters 1 and 2 in Game Theory and Economic Modeling.

[R] Schelling, "What is Game Theory?" Chapter 10 in Choice and Consequence, Harvard Uni-versity Press (Reprinted 2007), pp. 213-242. (Over the next two classes.)

[R] War games. Economist, 15 October 2005, p. 82.

Thursday, January 26: Prisoners�’ Dilemma and its Applications

[T] DSR, Chapter 4, Section 4.3.

[T] Kreps, Chapter 3 in Game Theory and Economic Modeling.

[R] Schelling, �“Hockey Helmets, Daylight Saving, and Other Binary Choices,�” Chapter 7 in Mi-cromotives and Macrobehavior, pp. 213-243.

[R] The Malls Get Decked: Retailers Minding Too Many Stores, The Street.com, November 22,2000.

�— Why We�’re So Nice: We�’re Wired to Cooperate. The New York Times, July 23, 2002.

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Tuesday, January 31: Pure Strategy Nash Equilibrium

[T] DSR, Chapter 4, Sections 4.1, 4.2, 4.4, 4.6, and 4.8 (additional reading: Chapter 5, Sections5.1 and 5.2).

Thursday, February 2: Multiple Nash Equilibria and EquilibriumSelection

[T] DSR, Chapter 4, Section 4.7

�— Amazon and the state of Illinois play a game of chicken over online tax collection, mindyour-decisions.com.

�— Lau and Leong, "ATM Banking + Game Theory = Prots," A.T. Kearney Report.

Tuesday, February 7 and Thursday, February 9: Mixed Strategies

[T] DSR, Chapter 7 (Section 7.5 optional).

[R] Game Theory for Swingers: What states should the candidates visit before Election Day?Slate, October 25, 2004.

[R] Rock, Paper, Payo : Child�’s Play Wins Auction House an Art Sale. The New York Times,April 29, 2005.

[R] The Art of the Save, for Goalie and Investor.The New York Times, March 1, 2008.

�— World Cup Game Theory. Slate, June 24, 2006.

�— Gardner, "Mixed Strategies and Blu ng: Liar�’s Poker," Section 4.3 in Games for Businessand Economics, pp. 83-86.

Tuesday, February 14: Repeated Games

[T] DSR, Chapter 11 (Sections 11.1-11.3 only).

�— Axelrod, The Evolution of Cooperation, Perseus Books (Rev Ed 2006), Chapters 1-4, pp.3-87.

Thursday, February 16: Collection Action and Collective InactionGames

[T] DSR, Chapter 12.

[R] Elster, "Social Norms and Economic Theory." Journal of Economic Perspectives, 1989, Vol.(3)4, pp. 99-117.

[R] Burger, �“Tragedy of the Commons: 30 Years Later.�” Environment, 1998, Vol. 40(10), pp.4-13.

�— Hardin, �“Extensions of �‘The Tragedy of the Commons.�’" Science, 1998, Vol. 280, pp. 682-683.

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Tuesday, February 21: Special Lecture on Elinor Ostrom�’s contri-butions to Collective (In)Action Problems

[R] Ostrom, "Collective Action and the Evolution of Social Norms.�” Journal of Economic Per-spectives, 2000, Vol. 14(3), pp.137-158.

[R] Ostrom, "A Behavioral Approach to the Rational Choice Theory of Collective Action: Presi-dential Address, American Political Science Association, 1997." The American Political Sci-ence Review, 1998, Vol. 92(1) (Mar., 1998), pp. 1-22.

[R] Christensen, "Thought Leader Inteview: Elinor Ostrom."Rotman Magazine, Fall 2010.

Thursday, February 23: Sequential-Move Games

[T] DSR, Chapter 3.

Tuesday, February 28: Simultaneous and Sequential-Moves Com-bined: Subgame Perfect Nash Equilibrium (SPNE)

[T] DSR, Chapter 6.

Thursday, March 1: Subgame Perfection and Strategic Moves

[T] DSR, Chapter 10.

[R] Dixit, �“Thomas Schelling�’s Contributions to Game Theory.�” Scandinavian Journal of Eco-nomics, 2006, Vol. 108(2), pp. 213-229.

[R] When It Can Be Good to Burn Your Boats. Financial Times, October 25, 1999.

Tuesday, March 6: Application of SPNE to Bargaining

[T] DSR, Chapter 18, Sections 18.3-18.5.

[R] Schelling, "An Essay on Bargaining," Chapter 2 in The Strategy of Conict, pp. 21-46.

[R] Two Developing Nations Agree to Reduce Greenhouse Emissions. Wall Street Journal, No-vember 12, 1998.

�— Roth et al, �“Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, andTokyo.�” American Economic Review, 1991,Vol. 81(5), pp. 1068-1095.

Thursday, March 8: Introduction to Games with Incomplete Infor-mation

[T] DSR, Chapter 9, Section 9.2.

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[R] Schelling, "Thermostats, Lemons, and Other Families of Models," Chapter 3 in Micromotivesand Macrobehavior, pp. 83-133.

�— Logren, Persson and Weibull. "Markets with Asymmetric Information: The Contributionsof George Akerlof, Michael Spence and Joseph Stiglitz." Scandinavian Journal of Economics,2002, Vol. 104(2), pp. 195-211.

Tuesday, March 13, Thursday, March 15: Spring Break (no classes)

Tuesday, March 20: Moral Hazard and Adverse Selection

[T] DSR, Chapter 9, Section 9.4.A.

[R] McMillan, "Creating Incentives" and "Designing Contracts," Chapters 8 and 9 in Games,Strategies, and Managers.

[R] Gneezy, Meier, and Rey-Biel. "When and Why Incentives (Don�’t) Work to Modify Behavior."Journal of Economic Perspectives, 2011, Vol. 25(4), pp. 191�—210.

[R] The moral-hazard myth. The New Yorker, August 29, 2005.

[R] Writing o tyrants�’ debt is a principle that should be extended to even poorer nations. TheGuardian, April 21, 2003.

Thursday, March 22 and Tuesday, March 27: Signaling games

[T] DSR, Chapter 9, Sections 9.4.B, 9.5, and 9.6.

�— Dixit and Nalebu , Chapter 8 in The Art of Strategy.

Thursday, March 29: Cheap Talk

[T] DSR, Section 9.3.

[R] Farrell and Rabin, �“Cheap Talk.�” Journal of Economic Perspectives, 1996, Vol. 10(3), pp.103-118.

Tuesday, April 3 and Thursday, April 5: Auctions

[T] DSR, Chapter 17.

[R] Migrom, �“Auctions and Bidding: A Primer.�” Journal of Economic Perspectives, 1989, Vol.3(3), pp. 3-22.

[R] McMillan, "Bidding in Competition" and "Bidding in Olympic Competition," Chapters 11and 12 in Games, Strategies, and Managers, pp. 133-159.

[R] Economic focus: Bidding adieu? The Economist. June 29, 2002.

�— Lucking-Reiley, "Auctions on the Internet: What�’s Being Auctioned, and How?" Journal ofIndustrial Economics, 2000, Vol. 48(3), pp. 227-252.

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�— McMillan, "Selling Spectrum Rights." Journal of Economic Perspectives, 1994, Vol. 8(3), pp.145-62.

�— Thaler, "The Winner�’s Curse," Chapter 5 in The Winner�’s Curse, Princeton University Press1994, pp. 50-62.

�— The Agony of Victory: Online Auctions and the Winner�’s Curse, Slate, March 19 1999.

Tuesday, April 10 and Thursday, April 12: Strategy and Voting

[T] DSR, Chapter 16.

�— Shepsle and Bonchek, "Strategic Behavior" and "Voting Methods and Electoral Systems,"Chapters 6 and 7 in Analyzing Politics, Norton 1997, pp.137-191.

Tuesday, April 17 and Thursday, April 19: Presentation of groupprojects

Tuesday, April 24: Power and limits to game theory

Thursday, April 26: Summing up

Thursday, May 3 (9:00 am): Final Exam

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