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Advanced Economics — Game Theory

Strategic interaction, equilibria, and mechanism design

N
nash_equilibrium 23 terms Jan 5, 2026
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Terms 23

1
Game Theory
Mathematical study of strategic decision-making among rational agents
2
Normal Form Game
Game represented as matrix with players, strategies, and payoffs; simultaneous choice
3
Extensive Form Game
Game tree showing sequential moves, information sets, and payoffs
4
Dominant Strategy
Strategy that is best regardless of what other players do
5
Dominated Strategy
Strategy that is always worse than another; rational players eliminate these iteratively
6
Nash Equilibrium
No player can improve payoff by unilaterally changing strategy; mutual best responses
7
Pure Strategy Nash Equilibrium
Each player chooses one strategy with certainty; not all games have one
8
Mixed Strategy Nash Equilibrium
Players randomize over strategies; every finite game has at least one (Nash's theorem)
9
Prisoner's Dilemma
Individually rational defection leads to mutually worse outcome; dominant strategy ≠ Pareto optimal
10
Pareto Optimality
Outcome where no player can be made better off without making another worse off
11
Zero-Sum Game
One player's gain exactly equals other's loss; minimax theorem applies
12
Repeated Games
Same game played multiple times; cooperation can be sustained by threat of punishment
13
Folk Theorem
Any feasible individually rational payoff can be sustained as Nash equilibrium in infinitely repeated game
14
Subgame Perfect Equilibrium
Nash equilibrium that is also optimal in every subgame; eliminates non-credible threats
15
Backward Induction
Solve sequential games from last stage backward; finds subgame perfect equilibria
16
Bayesian Nash Equilibrium
Equilibrium in games of incomplete information; players optimize over beliefs about opponents' types
17
Signaling Game
Informed sender sends signal; uninformed receiver takes action; separating vs pooling equilibria
18
Screening
Uninformed party designs menu of contracts to reveal informed party's type; adverse selection
19
Adverse Selection
Private information causes market failure; worse types more likely to trade; insurance, Lemons problem
20
Moral Hazard
Changed behavior after entering agreement; unobservable effort; principal-agent problem
21
Mechanism Design
Reverse game theory; design rules to achieve desired outcome given strategic players
22
Revelation Principle
Any mechanism can be replaced by direct truthful mechanism with same outcome
23
Auction Theory
First-price (bid highest-willingness), second-price (pay second-highest, Vickrey); revenue equivalence theorem