The institutional affiliation
1. An effective threat is cheaper that an effective promise. Explain why this is true. Provide a specific example.
Threats and promises are regarded as two main strategic moves used to impact the behavior and actions of others in a bargaining relationship. That type of relationship is considered as a situation where an individual is trying to influence another person’s option of action (McClintock, Stech, & Beggan, 1987).
Both threats and promises can be employed within a game-like situation to message a plan of cooperation or to operate other ("Threats, Promises, and Commitments", 2016). For instance, when a parent says to a child “If you do your homework till 5p.m., we will go to the cinema”, it is a promise. The level of commitment of a given action is assumed to increase. On the other hand, the sentence “You will do your homework till 5p.m. or we will never go to the cinema” is a threat. So, it is hardly possible that the message will be carried out.
In general, while working with threats and promises, you should make a chosen strategic move credible.
2. In the Tiny Poker game at the end of the lecture, each player has two different information sets and strategies. Remember that information set is the information you have available to you at the time you make your decision, and a strategy must tell you what to do given each information set. Describe the two information sets, and suggest two strategies.
Game theory is the study of statistical models of conflict and cooperation between reasonable and rational in the decision-making process. The ideas of game theory give an opportunity to pose, construct, review and comprehend strategic scenarios. In the game theory an information set is a set where a specific player indicates all the probable actions which could have occurred in the game taking into account what that player had noticed and detected so far.
A card game in which each player’s card is concealed from the other players can be named as an example of imperfect information games. For instance, Tiny Poker game is a very simplified version of poker where participants put money into a kitty. The player who wins gets all money from the kitty and in case when players tie, they separate money evenly. After that we get a single card from a deck of only three cards which are labeled “1”, “1” and “2”. The one who gets “2” wins ("Incomplete and Imperfect Information", 2011). The lecturer emphasized that there are two choices to be made: to fold or to continue and bet more. If one player looks at the card and sees “1”, then there is a fifty-fifty chance that the opponent has “2”. In this case, I have only two strategies, whether to quit or to bluff. In addition, the opponent has the same variants to choose if he/she also has “1”. The result will depend on how long the opponent kept playing and how often bluffing occurred.
3. How does the concept of moral hazard apply for the bailout of private corporations by the government? What other applications can you think of?
Moral hazard is a concept that illustrates the situation where somebody has a chance to take advantage of another person by risking that that person will pay. That idea represents the fact that people might neglect the moral involvement of choosing instead of doing right things. That in turn means that people do what meets their needs the most.
The insurance industry generated the idea of moral hazard. Insurance is a way to remove risk from one person to somebody else. For instance, an insurance company will repay in the case where you harm a car that you have rented. In return, you pay gradually an amount of money that seems fair and, as a result, everybody is satisfied. The presumption is that either your insurance company or you do not anticipate any destruction to be done (Pritchard & Pritchard, 2011). The statistics is used by the insurance companies to determine the permissible chances that reflect the likelihood of the vehicle to be harmed. According to this, they rate their services.
The mortgage companies are more likely to make higher risk loans if they know that if things go badly, the government will bail them out. In fact, anytime when the government considers a bailout the risk of a moral hazard is quite real ("Incomplete and Imperfect Information", 2011). However, the concept of a company being too great or too large to bust also reflects moral hazard. If the corporation’s management and the public consider that the corporation will obtain an economic bailout in order to keep it working on, then the governance might take more ventures in chasing benefits. Moral hazards are created by government safety nets that guide to even bigger risk taking process, disastrous events, accidents, panics and fear and, in addition, consolidate the necessity of more government controls. Therefore, the government has a need to make these nets stronger by adjusting and controlling in order to enlarge the moral hazard hereinafter.
In conclusion, the moral hazard became a considerable issue. The options instead of creating a moral hazard is to directly allow companies to miscarry when they take risks too much and permit the more powerful companies take over the rests of their failure.
References
Incomplete and Imperfect Information. (2011). YouTube. Retrieved 4 May 2016, from https://www.youtube.com/watch?v=--ULIAt67G8
McClintock, C., Stech, F., & Beggan, J. (1987). The effects of commitment to threats and promises upon bargaining behaviour and outcomes. European Journal Of Social Psychology, 17(4), 447-464. http://dx.doi.org/10.1002/ejsp.2420170405
Pritchard, J. & Pritchard, J. (2011). How Moral Hazard Works. About.com Money. Retrieved 4 May 2016, from http://banking.about.com/od/loans/a/MoralHazard.htm
Threats, Promises, and Commitments. (2011). YouTube. Retrieved 4 May 2016, from https://www.youtube.com/watch?v=mCNZc187fI4
