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In: Statistics and Probability

Consider a game between a tax collector (player 1) and a tax payer (player 2).  Player2 has...

Consider a game between a tax collector (player 1) and a tax payer (player 2).  Player2 has an income of 200 and may either report his income truthfully or lie.  If he reports truthfully, he pays 100 to player 1 and keeps the rest.  If player 2 lies and player 1 does not audit, then player 2 keeps all his income.  If player 2 lies and player 1 audits then player 2 gives all his income to player 1. The cost to player 1 of conducting an audit is 20.  Suppose that both parties move simultaneously (i.e.  player 1 must decide whether to audit before he knows player 2’s reported income).  Find the mixed-strategy Nash equilibrium for this game and the equilibrium payoffs to each player.  Explain in your own words the meaning of these results.

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orchestra answered 1 year ago
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