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Cooperation and coordination -DN chap. 9 - International Negotiations & Strategy Prof. Jasper S. Cooperation and coordination -DN chap. 9 - International Negotiations & Strategy Prof. Jasper S. Kim 092 SIS 88 AEO HYE JUNG

Invisible hand & Game theory The wealth of nations. ⇒ invisible hand make a Invisible hand & Game theory The wealth of nations. ⇒ invisible hand make a benefit. ⇒ by pursuing his own interest, he frequently promotes society. n Game theory. ⇒ every person has his own aims and strategies. ⇒ we examine the equilibrium of the game in which theses strategies interact. n

What are we going to study? Discuss the different types of failures in turn. What are we going to study? Discuss the different types of failures in turn. n Develop one central example. n Show the same problem arises much more widely. n Suggest how it may be solved. n

For whom the bell curve tolls Student’s study before examinations. ⇒ when grades are For whom the bell curve tolls Student’s study before examinations. ⇒ when grades are based on a traditional “bell curve, ”: n how much you know〈 others know less than you. ⇒ rat race: like a prisoners’ dilemma ⇒ form a cartel to limit competition: spring study ⇒ “no-studying” cartel: punishment can be social ostracism or worse

The route less traveled n There are two main way driving over the Bay The route less traveled n There are two main way driving over the Bay Bridge : 20 minutes taking public transportation (BART) : 40 minutes ⇒additional 2, 000 cars causes a 10 minute delay ⇒the equilibrium of a game: 40 minutes (40%=drive 60%=BART)

The route less traveled The route less traveled

The route less traveled Best for the group ⇒bay bridge: 2000 cars=total saving 20000 The route less traveled Best for the group ⇒bay bridge: 2000 cars=total saving 20000 minutes 3000 cars=total saving 15000 minutes ⇒how can the best pattern be achieved? using 2000 licenses to use bay bridge and rotating the licenses among the population every month. ⇒charge a toll for driving on the bay bridge an hour of time at 12$ ⇒ bay bridge fare= 2$ =10 minutes → 2000 people=4000$ ⇒ but toll booths may be a primary cause of congestion n

Catch-22? QWERTY ⇒in late 1800 s, designed a “new improved” layout ⇒ maximize the Catch-22? QWERTY ⇒in late 1800 s, designed a “new improved” layout ⇒ maximize the distance between the most frequently used letters. ⇒ reduce the jamming of keys on manual typewriter. ⇒ become the de facto industry standard. n DSK: more developed than QWERTY ⇒ reduce the distance typists’ fingers traveled by over 50% ⇒ be typed in 5 -10% less time n

Catch-22? n A bandwagon effect : uncoordinated decisions of individuals keep us tied to Catch-22? n A bandwagon effect : uncoordinated decisions of individuals keep us tied to QWERTY.

Catch-22? The historical accident that led to QWERTY capturing nearly 100% of typists ends Catch-22? The historical accident that led to QWERTY capturing nearly 100% of typists ends up being self-perpetuating. n There is the possibility of making everyone better off. n but it requires coordinated action. n Once one option has enough of a head start, alternative may never get the chance to develop n

Faster than a speeding ticket Faster than a speeding ticket

Faster than a speeding ticket n How can lawmakers make drivers keep the speed Faster than a speeding ticket n How can lawmakers make drivers keep the speed limit? ⇒ the key: to get a critical mass of drivers obeying the speed limit. ⇒ a short phase of extremely strict enforcement & harsh penalties.

Why did they leave? n white residents in an area rises above a critical Why did they leave? n white residents in an area rises above a critical level n ⇒ it quickly increases further to nearly 100% if it falls below a critical level, it is full of black residents

Why did they leave? The source of the problem is the effect of one Why did they leave? The source of the problem is the effect of one household’s action on the others. n The public policy can help stop the momentum toward tipping and preserve the delicate balances. ⇒ the town bans the use of “for sale” ⇒ the town offers insurance that guarantees homeowners that they will not lose the value of their house. n

It can be lonely at the top n n At the mythical firm Justin-case It can be lonely at the top n n At the mythical firm Justin-case The annual partnership decision ⇒ the abilities of ten junior associates were rated from 1 to 10, with 10 being the best ⇒ they all agreed that everyone making partner was a good idea ⇒they began with a cutoff of 1 ⇒they raise the cutoff to 2 ⇒finally, the standard was raised all the way up to 11 ⇒nobody would make partner

It can be lonely at the top Each step of the way can appear It can be lonely at the top Each step of the way can appear attractive to the vast majority of decision maker. ⇒ But the end is worse than then beginning for the every one. n If you are going to fail, you might as well fail at a difficult task. n

Politicians and apple cider Number the political positions from 0 to 100 n 0 Politicians and apple cider Number the political positions from 0 to 100 n 0 represents radical left and 100 represents arch-conservative. ⇒ challenger: 48 then, incumbent: 49 n then challenger figure out that his best bet is to locate right in the middle n

Politicians and apple cider n Harold Hotelling “our cities become uneconomically large and the Politicians and apple cider n Harold Hotelling “our cities become uneconomically large and the business districts within them are too concentrated. Methodist and Presbyterian churches are too much alike: cider id too homogeneous. ” No individual is content to remain squeezed in the middle. n Society has to find a different and coordinated way of reaching a stable outcome. n

The stock market and beauty contests Newspaper beauty contest ⇒the prize being awarded to The stock market and beauty contests Newspaper beauty contest ⇒the prize being awarded to the competitor chooses the average preference of the competitors as a whole ⇒each competitor thinks likeliest to catch the fancy of the other competitors. n In stock market ⇒one imagines that the stock with the highest earnings should have then highest price. n

A recapitulation The free market doesn’t always get it right. n There are two A recapitulation The free market doesn’t always get it right. n There are two fundamental problems. ⇒ one is that history matters. - accidents of history can’t necessarily be corrected by today’s market. ⇒ so much of what matters in life takes place outside the economic marketplace n the coordination failures illustrated are meant to show the role for public policy n

A prescription for allocating dentists A prescription for allocating dentists

A prescription for allocating dentists n n Additional city dentist lowers all other dentists’ A prescription for allocating dentists n n Additional city dentist lowers all other dentists’ income But this reduction in price is a benefit to consumers. Two side effects exactly cancel each other out. As each person makes a selfish choice, we are invisibly led to the right distribution of dentists between city and rural area.

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