Games, pre-commitment, and time inconsistency in the news Current events offer abundant examples of disputes in which the parties are involved in a game, try to commit themselves to lines of action in advance, and face issues of time inconsistency. Examples arise in the domestic political process, international affairs, and labor-management relations.

a. Choose a current dispute (or one resolved recently) to investigate. Do an internet search to learn the issues involved in the dispute, the actions taken by the parties to date, and the current state of play.

b. In what ways have the parties tried to pre-commit to certain actions in the future? Do they face issues of time inconsistency? Have the parties failed to carry out any of their threatened actions?

c. Does the dispute resemble a prisoner's dilemma game (a game with a payoff structure like the one described in Problem 6)? In other words, does it seem likely (or did it actually happen) that the individual incentives of the parties will lead them to an unfavorable outcome-one that could be improved for both parties through cooperation? Is there a deal to be made? What attempts have the parties made to negotiate?

d. How do you think the dispute will be resolved (or how has it been resolved)?

Data from Problem 6

Political expectations, inflation, and unemployment Consider a country with two political parties, Democrats and Republicans. Democrats care more about unemployment than Republicans, and Republicans care more about inflation than Democrats. When Democrats are in power, they choose an inflation rate of \(\pi_{D}\), and when Republicans are in power, they choose an inflation rate of \(\pi_{R}\). We assume that

An election is about to be held. Assume that expectations about inflation for the coming year (represented by \(\pi_{t}^{e}\) ) are formed before the election. (Essentially, this assumption means that wages for the coming year are set before the election.) Moreover, Democrats and Republicans have an equal chance of winning the election.

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The Phillips curve is given by - (uun)