Chapter 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 that it cannot influence Westria’s strategy...
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