The Production Game 1

1
The Production Game 1

• Players Principal, agent
• The Order of Play
• The principal offers a wage rate, w
• The agent decides whether to accept of reject the
  contract.
• If the agent accepts, he has to decide on effort,
  e
• Output equals q (e), with qgt 0
• Payoffs
• If the agents rejects ?agent U and ?principal
  0
• If the agents accepts ?agent U (e,w) and
• ?principal V (q-w)

2
The Production Game 2Full information. Agent
moves first

• In this version, every move is common knowledge
  and the contract is a function w(e).
• The Order of Play
• The agent offers the principal a contract w(e).
• The principal decides whether to accept of reject
  the contract.
• If the principal accepts, the agent exerts effort
  e.
• Output equals q (e), where qgt 0

3
The Broadway Game 1

• Players Producer and Investors
• The Order of Play
• The investors offer a wage contract w(q) as a
  function of revenue q.
• The producer accepts or rejects the contract.
• The producer chooses Embezzle or Do not embezzle.
• Nature picks the state of the world to be Success
  or Failure with equal probability.

4
The Broadway Game 1

• Payoffs
• The producer is risk averse and the investor is
  risk neutral. The producers payoff is U(100) if
  he rejects the contract, where U gt 0 and U lt
  0, and the investors payoff is 0. Otherwise
• ?producer U(w(q)50) if he embezzles
• ?producer U(w(q)) if he is honest
• ?investors q-w(q)

5
The Broadway Game 1

• Profits in Broadway Game
• Probabilities of profits in Broadway Game

Table 7.2 and 7.3 from Rasmussen, E. (2001)
Games Information. Blackwell, Malden. 3rd
Edition
6
The Lucky Executive Game

• Players A corporation and an executive
• The Order of Play
• The corporation offers the executive a contract
  which pays w(q)gt 0 depending on profit, q.
• The executive accepts the contract, or rejects it
  and receives his reservation utility of U 5.
• The executive exerts effort e of either 0 or 10.
• Nature chooses profit (see next slide).

7
The Lucky Executive Game

• Payoffs
• Both players are risk neutral. The corporations
  payoff is q w. The executives payoff is w e
  if he accepts the contract.
• Table of outputs

Table 8.1 from Rasmussen, E. (2001) Games
Information. Blackwell, Malden. 3rd Edition