Question
Hi, a need help in this problem related to game theory: Two players must agree on how to share a pie of size 1, before
Hi, a need help in this problem related to game theory:
Two players must agree on how to share a pie of size 1, before it rots by the end of period 5. In even periods 0, 2 and 4, player 1 propose a sharing rule (x, 1 ? x) that player 2 can accept or reject. If player 2 accepts any offer, the game ends. If player 2 rejects player 1's offers, then she can make an offer in the next odd period 1, 3 and 5. If player 1 accepts one of player 2's offers, the game ends.
The payoff of an offer (x, 1?x) accepted on period t is given by (?^t_1 x, ?^t_2 (1?x)), where x is players 1's share of the pie, and ?_1 and ?_2 are the two players' discount factors.
(a) Draw the extensive form of this game.
(b) Show that the strategy profile "player 1 always demands x = 1, and refuses all smaller shares; player 2 always offer x = 1 an accepts any offer?s a Nash equilibrium, but not a subgame perfect equilibrium.
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