ver. 28 Oct 15
Topics in Game Theory
PhD reading course , Fall 2015
Teachers:
Amrish Patel & Johan Stennek
Dates:
Second period fall 2015: 3rd November 2015 - 17th January 2016
Objectives:
1. Cover topics in game theory beyond compulsory graduate micro courses
2. Learn to read abstract and applied theory papers
3. Develop experience in modelling and presenting theory
Pre-course Micro II recap quiz/discussion:
We’ll have a roundtable to refresh memory of game theory. Please read Micro II
material and/or textbooks e.g. Osborne and Rubinstein or Fudenberg and Tirole.
Assessment:
Active participation in presentations (50%) and writing a research paper (50%)
For each topic:
1. Read compulsory papers (abstract and applied) and work together to give
a presentation (you may also find/read other relevant sources)
2. Present as if teaching. Focus on the main messages and results, not the
proofs. Provide good examples and intuitions. Explain why/how the
concept was used in the applied paper and whether it was reasonable etc.
3. If possible write your own simple “toy-models” to illustrate ideas
4. If you come up with ideas for interesting extensions or applications, do a
quick literature review and present the research idea to the group.
Research Paper:
Write a research paper with a theoretical model on a topic of your choice. Topic
must be approved by Amrish and Johan who will provide supervision. Generic
questions to bear in mind:

Does your paper answer a good question? What is your marginal
contribution relative to existing literature?

Does your model capture key aspects of your question? Is the analysis
internally consistent? How does it relate to other models on the topic?

Can you explain the intuition behind your results? Is your work “worth
listening to”?
You will present your work as a term paper and a seminar at a date to be agreed.
Varian (1997) “How to Build an Economic Model in Your Spare Time” (online)
Thomson (2011) “A Guide for the Young Economist” (book)
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Timetable
All meetings take place in E6 seminar room.
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2
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5
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9
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Week
45
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48
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50
51
51
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2
Date
Time
Topic
Monday 2nd Nov
13:00-16:00
Revision Quiz
Thursday 5th Nov
12:00-15:00 Further Classical Equilibria
Monday 9th Nov
13:00-16:00
Bayesian Games
th
Monday 16 Nov
13:00-16:00
Incomplete Contracts
th
Monday 23 Nov
13:00-16:00
Bargaining and Coalitions
Wednesday 2nd Dec 12:00-15:00 Link and Coalition Formation
Wednesday 9th Dec 13:00-16:00
Psychological Games
th
Monday 14 Dec
13:00-16:00
Consumer search
Thursday 17th Dec 12:00-15:00
Learning and Rationality
Tuesday 12th Jan
12:00-15:00
Evolutionary Games
th
Thursday 14 Jan
12:00-15:00
Student’s Choice
Later in Spring
Paper presentations
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2. Further Classical Equilibria
We study a generalisation of NE, Correlated Equilibrium, and a refinement of NE,
Trembling-Hand Perfect Equilibrium.
Compulsory
Correlated Equilibrium

Aumann, R. J. (1974) “Subjectivity and correlation in randomized
strategies” Journal of Mathematical Economics 1: 67-96.

Aumann, R. J. (1987) “Correlated equilibrium as an expression of
Bayesian Rationality” Econometrica 55(1): 1-18.
Trembling Hand Perfect Equilibrium

Selten, B. (1975) “Reexamination of the perfectness concept for
equilibrium points in extensive games” International Journal of Game
Theory 4(1): 25-55.

Anderhub, V. et al (2003) “Long-term work contracts versus sequential
spot markets: Experimental evidence on firm-specific investment” Labour
Economics 10(4): 407-425.
Further Reading
Brandenburger, A. (1992) “Knowledge and Equilibrium in Games” Journal of
Economic Perspectives 6(4): 83-101.
Both solution concepts will be covered in most game theory textbooks.
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3. Bayesian Games
We study two applied Bayesian games involving Cheap Talk and Signalling, while
consulting Bayesian solution concepts where relevant.
Compulsory

Crawford, V. P. and Sobel, J. (1982) “Strategic information transmission”
Econometrica 50(6): 1431-1451.

Benabou, R. and Tirole, J. (2006) “Incentives and Prosocial Behavior”
American Economic Review 96(5): 1652-1678.
Supplementary Reading
Kreps, D. M. and Wilson, R. (1982) “Sequential equilibrium” Econometrica 50(4):
863-894.
Fudenberg, D. and Tirole, J. (1991) “Perfect Bayesian equilibrium and sequential
equilibrium” Journal of Economic Theory 53: 236-260.
Cho, I.-K. and Kreps, D. M. (1987) “Signaling games and stable equilibria”
Quarterly Journal of Economics 102(2): 179-221.
Most game theory texts will cover Bayesian solution concepts.
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4. Theory of Incomplete Contracts
Split among yourselves the reading of Grossman & Hart and Hart, Shleifer and
Vishny.
This area is also covered in the text-book by Bolton. You may find a broader
background in Williamson.
Compulsory
Grossman, Sanford J., and Oliver D. Hart. (1986). The costs and benefits of
ownership: A theory of vertical and lateral integration. Journal of Political
Economy 94(4): 691-719.
Hart, O., Shleifer, A. and Vishny, R.W. (1997) “The proper scope of government:
Theory and application to prisons” Quarterly Journal of Economics 112(4): 11271161.
Supplementary Reading
Williamson, Oliver. (1985), The Economic Institutions of Capitalism, New York:
Free Press.
Botlton, Patrick, and Matthias Dewatripont (2005). Contract Theory. MIT Press.
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5. Multi-Person Bargaining and Coalition Formation
Read Horn & Wolinsky + at least one additional paper of your choice.
Compulsory
Horn, Henrik and Asher Wolinsky. (1988). "Worker Substitutability and Patterns
of Unionisation," Economic Journal, Royal Economic Society, vol. 98(391), pages
484-97, June.
More on interdependent bilateral bargaining
Björnerstedt, Jonas and Johan Stennek (2007). “Bilateral Oligopoly.”
International Journal of Industrial Organization, 25(2007) 884–907.
Think about further applications to perhaps bilateral trade agreement, supply
chains.
More on coalition formation (by means of bargaining)
Kamien, Morton I. and Israel Zang (1990). “The Limits of Monopolization through
Acquisition.” Quarterly Journal of Economics, 105, 465–499.
Kamien, Morton I. and Israel Zang (1993). “Monopolization by Sequential
Acquisition.” Journal of Law, Economics and Organization, 9, 205–229.
Fridolfsson, Sven-Olof and Johan Stennek (2005). “Why Mergers Reduce Profits,
and Raise Share Prices – A Theory of Preemptive Mergers.” Journal of the
European Economic Association, September 2005, 3(5): 1083-1104.
Think about further application to e.g. monetary unions, environmental
agreements.
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6. Link Formation
All read all compulsory papers. Split among yourselves the presentation of Goyal
& Joshi (2006) and Goyal, Moraga-González & Konovalov (2008).
Compulsory
Goyal, Sanjee and Sumit Joshi. (2006). Unequal connections. International Journal
of Game Theory, October 2006, Volume 34, Issue 3, pp 319-349.
Goyal, Sanjee, José Luis Moraga-González & Alexander Konovalov, 2008. "Hybrid
R&D," Journal of the European Economic Association, MIT Press, vol. 6(6), pages
1309-1338, December.
Further Reading
Jackson, M. O. and Wolinsky, A. (1996) “A strategic model of social and economic
networks” Journal of Economic Theory 71: 44-74.
Jackson, M. O. (2010) “Social and Economic Networks” Princeton University
Press.
Zenou, Y. (2013) “Networks in Economics” in International Encyclopaedia of
Social and Behavioral Sciences, Elsevier.
Jackson, M. O. and Zenou, Y. (2014) “Games on Networks” in Handbook of Game
Theory vol. 4, Young, P. and Zamir, S. Eds.
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7. Psychological Game Theory
An applied and general paper on games where payoffs depend on beliefs and
Martin’s lecture on various aspects of psychological game theory.
Compulsory

Geanakopolos, J., Pearce, D. and Stacchetti, E. (1989) “Psychological games
and sequential rationality” Games and Economic Behavior 1(1): 60-79.

Rabin, M. (1993) “Incorporating fairness into game theory and
economics” American Economic Review 83(5): 1281-1302.
Martin’s lecture on Psychological Games

Dufwenberg, M. and Kirchsteiger, G. (2004) “A theory of sequential
reciprocity” Games and Economic Behavior 47: 268-298.

Dufwenberg, M. and Battigalli, P. (2007) “Guilt in games” American
Economic Review 97(2): 170-176.

Dufwenberg, M. and Battigalli, P. (2009) “Dynamic psychological games”
Journal of Economic Theory 144: 1-35.
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8. Consumer Search
Compulsory

TBA.
Martin’s lecture on Psychological Games

TBA.
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9. Learning and Rationality
We revisit iterated dominance in more detail and consider a non-equilibrium
approach, level-k thinking (Martin’s lecture), study a behavioural game theoretic
solution concept, Cursed Equilibrium, and a learning model. Recent review
papers on behavioural game theory are recommended for holiday reading.
Compulsory

Eyster, E. and Rabin, M. (2005) “Cursed equilibrium” Econometrica 73(5):
1623-1672.

A paper on learning: e.g. Fudenberg and Levine?
Martin’s lecture on Dominance/Rationalizability/Level-k

Dufwenberg, M. and Stegeman, D. (2002) “Existence and uniqueness of
maximal reductions under iterated strict dominance” Econometrica 70(5):
2007-2023.

Crawford, V. (2003) “Lying for strategic advantage: Rational and
boundedly rational misrepresentation of intentions” American Economic
Review 93: 133-149.

Crawford, V. and Iriberri, N. (2007) “Fatal attraction: Salience, Naivete
and Sophistication in Experimental “Hide and Seek Games”” American
Economic Review 97: 1731-1750.
Christmas reading: Forum on the role of bounded rationality versus behavioural
optimisation in economic models

Harstad, R. M. and Selten, R. (2013) “Bounded-rationality models: Tasks
to become intellectually competitive” Journal of Economic Literature
51(2): 496-511.

Crawford, V. (2013) “Boundedly rational versus optimization-based
models of strategic thinking and learning in games” Journal of Economic
Literature 51(2): 512-527.

Rabin, M. (2013) “Incorporating limited rationality into economics”
Journal of Economic Literature 51(2): 528-543.
Further reading:
Camerer, C. (2003) Behavioral Game Theory: Experiments in Strategic Interaction.
Princeton University Press.
Crawford, V., Costa-Gomes, M. A. and Ibiberri, N. (2013) “Structural models of
nonequilibrium strategic thinking: Theory, evidence and applications” Journal of
Economic Perspectives 51(1): 5-62.
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10. Evolutionary games
All read Weibull chapters 2 (focus on cheap talk) and 3 (just to get the basic
idea). Split among yourselves the reading of Vega-Redondo and Rayo et al.
In all cases, focus more on motivation and ideas and less on technicalities. If you
read Vega-Redondo, notice that the intuition is better explained in Schaffer
(which lacks in rigor).
A few differences between the papers are worth noting:
Vega-Redondo and Schaffer consider selection in a game environment while
Rayo et al consider selection in a decision environment.
The first two employ explicit evolutionary solution concepts while the latter
simply uses optimization techniques.
The first two consider selection directly on behavior, while the latter consider
indirect evolution (evolution on decision-making procedures – in this case utility
functions) which in turn select behavior).

Weibul, Jörgen (1995). Evolutionary Game Theory, MIT Press.

Rayo, L., & Becker, G. S. (2007). Evolutionary efficiency and
happiness. Journal of Political Economy, 115(2), 302–337.

Vega-Redondo, F. (1997). The evolution of Walrasian behavior.
Econometrica: Journal of the Econometric Society, 65(2), 375–384.

Schaffer, M. E. (1989). Are profit-maximisers the best survivors?: A
Darwinian model of economic natural selection. Journal of Economic
Behavior & Organization, 12(1), 29–45.
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11. Student’s Choice
Each student is free to select a paper according to personal interests and to
present it in 15 minutes. The only restriction is that the paper should either be
based on other solution concepts than Nash or Subgame perfection or contain
some more fundamental contribution. An alternative is to present a sketch of an
own model.
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