We consider games in which players move sequentially rather than simultaneously, starting with a game involving a borrower and a lender. We analyze the game using "backward induction." The game features moral hazard: the borrower will not repay a large loan. We discuss possible remedies for this kind of problem. One remedy involves incentive design: writing contracts that give the borrower an incentive to repay. Another involves commitment strategies; in this case providing collateral. We consider other commitment strategies such as burning boats. But the key lesson of the day is the idea of backward induction.

📑 Lecture Chapters:

Sequential Games: Backward Induction [00:00:00]
Sequential Games: Moral Hazard [00:17:57]
Sequential Games: Incentive Design [00:29:50]
Sequential Games: Commitment Strategies [00:44:29]
Sequential Games: Backward Induction Is Really Important [01:01:06]

Source: Ben Polak, Game Theory (Yale University: Open Yale Courses). Licensed under CC BY-NC-SA 3.0.