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 Games and Information . The same problem arises on a private level when parents decide how much to help a lazy child.
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
D. Try again. If the Government chooses such a high probability of Aid, the Pauper will always choose Loaf. But that can't be a Nash equilibrium, because then the Government would want to deviate to a pure strategy of NoAid.
If the Government chooses a probability of .9 forAid, for example, then
Pauper's Payoff (Work) = .3 (2) + .7(1) = 1.3 > Pauper's Payoff (Loaf)=.3(3) + .7 (0) =.9,
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.