PAUPER Work Loaf Aid 3,2 -1,3 GOVERNMENT No Aid -1,1 0,0``The Welfare Game'' models a government that wishes to aid a pauper if he searches for work but not otherwise, and a pauper who searches for work only if he cannot depend on government aid. This is a well-known problem in public policy, called ``The Samaritan's Dilemma'' by Tullock (1983, p. 59), who attributes it to James Buchanan. I use it in Chapter 3 of

3_1 What is the Nash equilibrium probability of Aid for the Government?

A. Between 0 and .2, inclusive.

B. Greater than .2 but less than .5.

C. Between .5 and .7, inclusive

D. Greater than .7

A. Try again. If the Government chooses such a low probability of Aid, the Pauper will always choose Work. But that can't be a Nash equilibrium, because then the Government would want to deviate to a pure strategy of Aid.

If the Government chooses a probability of .1 for Aid, for example, then

Pauper's Payoff (Work) = .1 (2) + .9(1) = 1.1 > Pauper's Payoff (Loaf)=.1(3) + .9 (0) =.3,

so the Pauper will Work all the time, and the Government will wish to deviate to Aid all the time.

To find a Nash equilibrium, in which each player would not deviate from his equilibrium mixing probability, you need to choose a mixing probability X for the Government such that the Pauper does no better from Work than from Loaf. To do that, you solve

Pauper's Payoff (Work) =X (2) + (1-X)(1) = Pauper's Payoff (Loaf)=X(3) + (1-X) (0).

Return to Self Test 2.

Send comments to Prof. Rasmusen. Last updated: December 3, 1996