Worksheet #3: Repeated Games 1. When state governments compete to attract businesses to their state by giving tax breaks, this is often an example of a prisoner's dilemma. For instance, consider the following game between Connecticut and New York trying to attract Amazon to put its headquarters in their states. If one state offers a tax break, then Amazon will go to that state, which gives them a payoff of 4 while the other state only gets 1. If both offer a tax break, then Amazon splits its headquarters amongst the two states, and each state gets 2 (they have to pay the cost of the tax break). If neither offers a tax break, Amazon also splits its headquarters, but this time each state gets 3 as they don't have to offer the tax break. You can think of this as a repeated game that states play, as many more companies besides Amazon are searching for a place to put their headquarters each period. NY Tax Break None Tax 2 , 2 CT Break None 1 , 43 , 3 A. Why is this a prisoner's dilemma? B. What strategy can be thought of as "cooperating"? C. Under what interest rate would a state cooperate if threatened with a grim trigger strategy? D. Under what interest rate would a state cooperate if threatened with a tit-for-tat strategy? E. If threatened with a tit-for-TWO-tat strategy, how could a state take advantage of this