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Application Assuming the game is single-shot (a finite number of sessions will be held to consider distribution proposals for the surplus), we make the additional assumption that if no allocation is agreed in the final period, then the surplus is not distributed and all partners end up with 0. If so, we have a simple application of Baron & Ferejohn (1989) - [http://www.edegan.com/wiki/index.php/Baron_Ferejohn_%281989%29_-_Bargaining_In_Legislatures#Closed_Rule_-_Two_Sessions Close Rule, Finite Session (e.g. n=2)]. Backwards induction thus yields a SPNE in which each member, if recognized, makes the same majoritarian proposal to distribute the benefits to a minimal winning majority (characterized in Proposition 1). For simplicity, normalize the total surplus to 1. In equilibrium, the first partner (randomly selected in the first session), proposes an allocation of <math>\frac{\delta}{n}\,</math> to any <math>(n-1)/2\,</math> other randomly selected partners and proposes to keep the remaining <math> 1 - \frac{\delta(n-1)}{2n}\,</math> for himself. The proposal is approved, and the game ends in the first period.
BPP Field Exam 2006 Answers (view source)
Revision as of 20:51, 20 February 2011
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'''a.) Outline a model of the above situation. Assuming the game is a single-shot and there are no punishments by the partnership (no reputation effects), discuss the equilibrium for your model. Note: you do not have to solve the model; simply discuss the proposition(s) you expect that could be derived and the intuition(s) behind it (them).'''
'''b.) Suppose that the partnership (membership) is stable, infinitely-lived, and makes a surplus allocation decision every year. How would you account for this in your model? Discuss equilibrium behavior and strategies using these assumptions (again you do not need to explicitly solve the model, simply explain your reasoning).'''
