Chapter 4: Nash Equilibrium and Public Policy
4. Nash equilibrium and public policy The best-known ideas in game theory are within non-cooperative game theory, and probably the single best-known example in game theory is the Prisoner’s Dilemma, a non-cooperative example. This example shows how interactive self-interested decisions may lead to results that are less favorable to all participants than some other outcome would be. The Prisoner’s Dilemma example can be generalized to a class of non-cooperative normal form games known as “social dilemmas” (Dawes, 1980) that share similar broad qualities. From the pragmatic point of view, non-cooperative game theory provides powerful tools for the identification and specification of problems, as the social dilemmas exemplify. On the whole, moreover, noncooperative game theory is a relatively settled, mature study. Social dilemmas are a class of Nash equilibrium models, and Nash equilibria are well understood and the foundation of most applications of non-cooperative game theory. However, there are some unsettled issues and some other proposed approaches to the solution of non-cooperative games. This chapter will review a number of Nash equilibrium models with a view to their applicability to public policy studies. 4.1 SOCIAL DILEMMAS While the Prisoner’s Dilemma is the best-known example in game theory, it is also one of the simplest, and its simplicity does place some limits on its application. 4.1.1 Symmetrical Dilemmas The Prisoner’s Dilemma begins with a story of interrogation. For this discussion, we may instead recall the Water Game from Chapter 2, where it is shown in normal form as Table 2.1. Eastland knows...
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