Laszlo Csontos

Term: Fall 1994

Department of Political Science

CENTRAL EUROPEAN UNIVERSITY

**I. Course Summary
**

"Rational choice theory" is a catch-all phrase, the extension of which can be subdivided into at least three different categories. It includes (i) the theory of individual decision making and the different branches of this theory; (ii) game theory in its many different varieties, and, finally, (iii) social (or public) choice theory. This course will focus on decision and game theory; social choice theory will only be touched upon, mainly when we discuss theories of bargaining.

The textbook for this course is GAME THEORY AND POLITICAL THEORY,

Jones, A.J.,* *__Game Theory: Mathematical Models of Conflict__,* *Chichester, Ellis Horwood Ltd, 1980.

Luce, R.D. & H. Raiffa, __Games and Decisions: Introduction and Critical Survey__, New York, Wiley, 1957.

Rasmusen, E., __Games and Information,__ Cambridge, Mass., Blackwell, 2nd. ed., 1994.

Myerson, R. B., __Game Theory: Analysis of Conflict__, Cambridge, Mass., Harvard University Press, 1991

**IV. Recommmended Texts:
**

To get the flavour of the game of the theoretical reasoning in the social sciences students should read either

Additional texts listed below as optional readings give further, in -depth information about specific questions.

I give two midterm exams during the trimester plus a final exam. While the second midterm will emphasize material covered since the first exam, the final exam will be over material from the entire course.

To help the students better focus their study and analysis of the material, I will provide study questions for the text, readings and lectures. Answers to these questions are not supposed to be handed in to me in written form, rather they are for the benefit of the students. Many of them will be discussed in class. These questions are representative of the questions that students will face on the midterm and the final exams. Each of the two term exams will be weighted at 20%, while the final exam will count 40%.

To develop better research and writing skills, students will write a longer research paper during the course. The paper is a semester-long project analyzing some conceptual or substantive issue in terms of decision or game theory. It should be 15-20 pages in length, typed double-spaced, with standard margins and a cover sheet containing a title for the paper, the author's (the student's) name, and a brief abstract. The paper is going to form 20% of the final course grade, and it is due by the end of the first week after the winter break.

**VI. Schedule and Assignments.**

First week:

1. Introduction.

2. Overview of the Course.

Optional Readings:

Binmore, K., __Fun and Games,__* *Lexington, Mass. - Toronto, D.C. Heath and Co., 1992, Introduction.

Second Week:

1. Concepts and Axioms of Decision Theory.

2. Utility Maximization - Decision under Certainty.

3. Expected Utility Maximization - Decision under Uncertainty.

4. Bayesian Models of Decision Making.

Required Readings:

Ordeshook, __op. cit.,__ Ch.l.

Jones, __op. cit.,__* *Ch.l.

Myerson, __op. cit.,__* *Ch. 1.

Recommended Readings:

Machina, M. J., "Choice under Uncertainty: Problems Solved and Unsolved", reprinted in John D. Hey (ed.), __Current Issues in Macroeconomics,__ New York: St. Martin' s Press, 1989; pp. 12-47.

Third Week:

1. Basic Concepts of Game Theory.

2. Zero-sum Games.

3. Dominant Strategies.

4. Iterated Dominance.

Required Readings:

Ordeshook, __op. cit.__,* *Ch.3.

Jones, __op. cit.__, Ch. 2.

Luce & Raiffa, __op. cit.__, Chs. 3-4.

Rasmusen, __op. cit.__,* *Ch. 1.

Recommend Readings:

Schelling, Th. C., __The Strategy of Conflict__, * *Cambridge, Mass., Harvard University Press, 1960.

Fourth Week:

1. Nash Equilibria and Focal Points.

2. The Normal and Extensive Forms of a Game.

3. Information Sets.

4. Bayesian Games.

Required Readings:

Ordeshook, __op. cit.__*, *Ch.4.

Rasmusen, __op. cit .__*, *Ch. 2.

Fifth Week:

1. Mixed and Continuous Strategies.

2. The Minimax Theorem.

3. Solutions and Equilibria.

4. Solving n x m Games.

Required Readings:

Jones, __op . cit .__*, *Ch. 3.

Rasmusen, __op. cit .__*, *Ch. 3.

Recommended Readings:

Shubik, M., __Game Theory in the Social Sciences__, Cambridge, Mass.,

The MIT Press, 1982; Ch. 8.

Sixth Week:

l. Two-Person Non-Zero-Sum Games.

2. Cooperative Games.

3. Bargaining Set.

4. Nash and Threat Bargaining Solutions.

Required Readings:

Ordeshook, __op. cit .,__* *Ch.5.

Luce & Raiffa, __op. cit.__,* *Chs. 5-6.

Myerson; __op. cit.__, Ch. 8.

Recommended Readings:

Shubik, __op. cit.__, Chs. 9-10

Seventh Week:

1. N - Person Games.

2. Characteristic Function.

3. Imputations.

4. The Core.

Required Readings:

Ordershook, __op.cit.,__ Chs. 7-8.

Jones, __op. cit.,__ Ch. 4.

Luce and Raiffa, __op. cit.__, Chs. 7-8.

Eigth Week:

1. Coalitional Games.

2. Bargaining.

3. Alternating Offers.

4. Incomplete Information.

Required Readings:

Ordershook , __op. cit.__, Ch.9.

Jones, __ op. cit.__ Ch. 5.

Myerson, __op. cit.__, Chs. 7-8.

Rasmusen, __op. cit.__, Ch. 10.

Recommended Readings:

Osborne, M.L.& A. Rubinstein, Bargaining and Markets, San Diego, Academic Press, 1990.

Ninth Week:

1. Dynamic Games with Symmetric Information.

2. Subgame Perfectness.

3. The Idea of Credible Threats and Credible Commitments.

4. Repeated Games and Reputations.

Required Readings:

Ordeshook, __op. cit.__*, *Ch. 10.

Rasmusen, __op. cit.__, Ch. 4.

Tenth Week.

1. Dynamic Games with Asymmetric Information.

2. Bayesian Equilibria.

3. Common Knowledge.

4. Incomplete Information in the Repeated Prisoner's Dilemma.

Required Readings:

Rasmusen, __op. cit.__*, *Ch 5.

Eleventh Week:

1. Evolutionary Games.

2. Evolutionary Stable Strategies.

3. War of Attrition.

4. Dynamic Evolutionary Games.

Required Readings:

Rasmusen, __op. cit.__*, *Ch. 5.

Recommended Readings:

Maynard Smith, J., __Evolution and the Theory of Games, __Cambridge Press, Cambridge, U.K., 1982.

Twelfth through Fourteenth Weeks:

1. Moral Hazard: Hidden Actions.

2. Moral Hazard: Hidden Information.

3. Adverse Selection.

4. Signalling.

Required Readings:

Rasmusen, __op. cit.,__* *Chs. 6-9.

Recommended Readings:

Fudenberg, D. & J. Tirole, __Game Theory__*, *Cambridge, Mass., The MIT Press, 1991; Chs. 8-9.

Digitized version prepared by the Curriculum Resource Center (CRC)

CEU Budapest, Hungary

Revised: April, 1996

Cso_Rational.F94PS.v6