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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 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. 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 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 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 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 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 QWERTY.
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 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 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 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 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 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 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 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 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 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 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.