Problem
I. Use the following payoff table and the concept of a Nash equilibrium to determine whether each party (corporations and standard setters) will play strong and not compromise with respect to a proposed accounting standard or will compromise to find a solution both parties can live with. In other words, identify the Nash equilibrium solution. Assume the game is non-cooperative. Payoffs are listed in the order (corporations, standardsetter).
|
|
|
Standard Setter
|
|
|
|
Compromise
|
Play Strong
|
|
Corporations
|
Compromise
|
30,30
|
8,40
|
|
Play Strong
|
20,10
|
12,15
|
II. Does the Nash equilibrium change if the corporations' payoffs for playing strong are decreasedby 5 no matter what the standardsetter decides to do? Explain why they do or do not change.
III. This table is a model to predict how a change in accounting standards would be negotiated between corporations and standard setters. What actual event or eventsmight cause corporations' payoffs to decrease as described in II.