13. Sequential games: moral hazard, incentives, and hungry lions

Game Theory (ECON 159) We consider games in which players move sequentially rather than simultaneously, starting with a game involving a borrower and a lender. We analyze the game using "backward induction." The game features moral hazard: the borrower will not repay a large loan. We discuss possible remedies for this kind of problem. One remedy involves incentive design: writing contracts that give the borrower an incentive to repay. Another involves commitment strategies; in this case providing collateral. We consider other commitment strategies such as burning boats. But the key lesson of the day is the idea of backward induction. 00:00 - Chapter 1. Sequential Games: Backward Induction 17:57 - Chapter 2. Sequential Games: Moral Hazard 29:50 - Chapter 3. Sequential Games: Incentive Design 44:29 - Chapter 4. Sequential Games: Commitment Strategies 01:01:06 - Chapter 5. Sequential Games: Backward Induction Is Really Important Complete course materials are available at the Yale Online website: online.yale.edu This course was recorded in Fall 2007.