Two firms have both been illegally polluting a nearby river. The pollution is common  knowledge between the firms. If no one reports any pollution, the government never finds out (or at least 

can't prove anything), and no one pays a fine. If at least one firm voluntarily reports their  own pollution, the government discovers the polluting activity of both firms. In this case, reporting

 firms pay a small fine, and non-reporting firms pay a big fine. Thus, the game looks like this (payoffs are quarterly profits in millions after potential fines): 

 

a. Find all NE.
Now suppose Firm 2 observes Firm 1's move before deciding whether to report; everything else
remains the same.
b. Is this a game of perfect or imperfect information?
c. How many information nodes does player 2 have?
d. Find all NE of this dynamic game.
e. Find all SPNE.
 

Transcribed Image Text:

Firm 1 Firm 2 Report Don't report Report 10, 10 0, 10 Don't report 10,0 20, 20 Firm 1 Firm 2 Report Don't report Report 10, 10 0, 10 Don't report 10,0 20, 20

Answer rating: 100% (QA)

a To find Nash EquilibriaNE Where there is no player whos is advantaged in terms of payoff conside... View the full answer