Pia 2162: Incentives and Behavior in Organizations: Applications of Game Theory



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GRADUATE SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS

UNIVERSITY OF PITTSBURGH


PIA 2162: Incentives and Behavior in Organizations: Applications of Game Theory




SPRING 2011


Instructor: Prof. Sera Linardi

E-mail /Phone: linardi@pitt.edu / 412.648.7650

Lecture hours: Tuesday 3 pm to 6 pm

Lecture hall: 3800 WWPH

Regular Office Hours: Tuesday 10:00-11:00am at WWPH 3203

Skype Office Hours: Monday 8:30-9:30pm (Skype ID: seralinardi)
TA: Farhod Yuldashev

Email: fay13@pitt.edu

Office hour: Monday TBA at GSPIA student lounge
Secretary: Susan Sawyers

E-mail: suzanc@gspia.pitt.edu

Office: WWPH 3201

An incentive is a factor that motivates behavior, such as the expectation of a reward or the fear of punishment. As humans, we all devise strategies (or plans of action) in response to perceived incentives. Sometimes the success of these plans depends only on our own skill or effort. More often, however, our chance to secure rewards or avoid punishments depends on our interaction with others human beings who are motivated by their own set of (possibly similar) incentives. Game theory provide the tools to analyze this interactive process of strategic thinking.


Goal:

  1. sharpen and systematize your intuitive understanding of incentives and behavior through game theory and behavioral economics

  2. identify and model strategic issues in real world cases.

  3. communicate your analysis in a compelling and concise manner

This class requires that you are comfortable with high school level algebra (e.g: plotting linear functions such as y=ax+b, solving for x in the previous equation). If you are a bit rusty, search for ‘algebra refresher’ online (e.g http://www.gcu.ac.uk/els/documents/AlgebraRefresherPack.pdf) and work through it during break. A little bit of preparation now will make this class much more enjoyable for you.


Required text:
Game Theory:

1. Dixit, Avinash K. and Susan Skeath (DS), Games of Strategy (2nd edition or 3rd edition), Norton


Behavioral Economics and Public Policy:

2. Ariely, Dan. Predictably Irrational:  The Hidden Forces That Shape Our Decisions, Harper Perennial.

3. Thaler, Richard H. and Cass R. Sunstein. Nudge:  Improving Decisions About Health, Wealth, and Happiness, Penguin.
Some links that may be interesting for your case study:

* Security: http://www.princeton.edu/~jns/teaching/Pol%20554%20Spring%202010%20Public.pdf

* Environment: http://www.econ.ucsd.edu/~tgroves/Econ182/index.html

* NGO/Public Organizations Management: http://econ.lse.ac.uk/staff/mghatak/pubsyllorg.pdf

* Education: http://isites.harvard.edu/fs/docs/icb.topic858293.files/syllabi08/ZajoncSyl08.pdf

* Microfinance: http://www.isb.uzh.ch/studium/hs10/pdf/Syllabus_Microfinance_HS_2010.pdf

There are 3 main sections of the course: Game Theory Basics, Uncertainty and Information, and Behavioral Economics. We will explore the iterative process of making simplifying assumptions, conducting analysis, and returning to the complex reality to assess the assumptions.
Grading:
There will be one homework (15%) and one exam (18%) for each section (except for Part III). Homeworks includes problems and a 1 page analysis of a published game-theoretic public/international affairs paper. Homework assignments are due at the beginning of the lecture the following week. Exams are conducted in-class during the first 90 minutes of class time. Exams test your ability to quickly and intuitively apply theoretical concepts to real world situations. The case study is an opportunity to (1) make yourself heard in a competitive forum (2) work in teams.

In short, the grade for this course will be determined from :

2 homeworks (15% each). Total: 30%

3 exams (18%) each: Total: 54%

Final case study (group): 16% (10% audience evaluation + 6% own group evaluation)
You will be given one freebie this semester, which means that you can turn in one homework set late by 5 days, no question asked. For the freebie: turn in the late homework by Monday noon to Susan Sawyer’s office. Use this wisely and only for emergencies such as illness. The Monday noon deadline will be enforced strictly since I plan to return graded homeworks and post solutions on Monday afternoon. Apart from the freebie, late assignments will not be accepted. Graded freebies are returned a week later.
When you feel that mistakes have been made in determining the grade of your assignment or exams, we are happy to regrade them. Here are the steps to take:


  1. Please compare your answers to the posted solutions

  2. Please submit a written request stating your reasons for a regrade. If there are specific questions/answers that you want to explain, please do so. Submit the requests to me (Sera) at class or office hours, or you can drop it off with the administrative assistant for the class (Susan Sawyers).

  3. We will regrade the ENTIRE exam (using the posted solutions as before). This may result in a higher or lower grade than your original grade. 


Abbreviated Schedule (detailed schedule with reading to follow).
PART 1: Game Theory Basics
Week 1 (1/11) Introduction (DS Ch 1 & 2)

Preferences and utility. Rationality. Financial, reputational and moral incentives. Perverse responses to incentives. Individual decision making vs strategic interaction. Classification of games.


Week 2 (1/18) Sequential games (DS Ch 3, 6, 9)

Backwards Induction. Subgame Perfect Nash Equilibrium. Credibility and Commitment. Threats and the chain store game. Relationship to simultaneous games.



Week 3 (1/25) Simultaneous games: Nash Equilibrium and Mixed Strategies (DS Ch 4, 5, 11)

Public Good games, Tragedy of the Commons, Battle of the Sexes, Matching Pennies, Arms Race.



HW I posted.
Week 4 (2/1) Repeated games (DS Ch 8 & 10)

How to resolve the Prisoner’s Dilemma.



HW I due.
Week 5 (2/8) Exam I.

Case studies: Brinksmanship in Cuban Missile Crises. Use courseweb Bulletin Board to find group members and refine topics.


PART II: Uncertainty and Information
Week 6 (2/15) Information asymmetry (http://nobelprize.org/nobel_prizes/economics/laureates/2001/ecoadv.pdf )

Principal-agent framework. Adverse selection and moral hazard. Signaling and screening.


Week 7 (2/22) Manipulating Information (DS Ch 12)

Pooling and separating equilibrium. Signaling and cheap talk.


Week 8 (3/1) Bargaining (DS Ch 16) and Incentive Design I: Contracts.

Conflict resolution.



HW 2 posted.
Week 9 (3/8) Break
Week 10 (3/15) Incentive Design II: Tournaments, Partnerships, Monitoring

Papers TBA



HW 2 due.
Week 10 (3/22) Exam II.

Experiments. Make appointment with instructor to discuss case studies.


PART III: Behavioral Economics
Week 11 (3/29) Introduction: Rationality, Psychology, and Experiments (Predictably Irrational)

Altruism, fairness, loss aversion, present bias, and more. Human cognition. Decision making through heuristics. The mistakes we make, over and over and over again.


Week 12 (4/5) Policy-making through behavioral economics (Nudge)

Week 13 (4/12) Case Study Presentations I

Discuss limitations of game theory and behavioral economics.


Week 14 (4/19) Exam III.
Week 15 (4/26) Case Study Presentations II


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