Prof. Dr.
Alicia von Schenk WS 2025/2026
Behavioral Economics
Problem Set 2 – Results
Problem 1: Static 2x2 Games with Incomplete Information . . . . . . . . . . . . . . . . .
Consider the following static 2x2-Games with incomplete information. Player 1 knows
exactly which game will be played, while player 2 has only a prior belief about which
game will be played.
Game 1 (with Prob. 21 ) Game 2 (with Prob. 12 )
Player 2 Player 2
L R L R
Player 1 U 2, 3 6, 0 Player 1 U 2, 2 3, 0
D 1, 0 5, 1 D 3, 0 4, 2
a. Determine all Bayesian Nash-equilibria in pure strategies for this game.
Solution:
Game 1: Player 1 will always play U .
Game 2: Player 1 will always play D.
Expected utilties of Player 2:
1 1 3
Eu2 (L) = ·3+ ·0=
2 2 2
1 1
Eu2 (R) = · 0 + · 2 = 1
2 2
1
⇒ BNE : s∗ = ((U, D), L), µ =
2
Page 1 of 5
b. Assume now that Game 1 will be played with probability µ and Game 2 with
(1 − µ). Determine all Bayesian Nash-equilibria in pure strategies depending on
µ.
Solution:
Eu2 (L) = µ · 3 + (1 − µ) · 0 = 3µ
Eu2 (R) = µ · 0 + (1 − µ) · 2 = 2 − 2µ
Eu2 (L) ≥ Eu2 (R)
⇔ 3µ ≥ 2 − 2µ
2
⇔ µ≥
5
2
⇒ BNE1 : s∗ = ((U, D), L), µ ≥
5
∗ 2
BNE2 : s = ((U, D), R), µ ≤
5
c. Assume now that the payoffs change as follows:
Game 1 (with Prob. µ) Game 2 (with Prob. 1 − µ)
Player 2 Player 2
L R L R
Player 1 U 2, 3 5, 0 Player 1 U 3, 2 3, 5
D 1, 2 6, 1 D 2, 0 4, 2
Determine all Bayesian Nash-equilibria in pure strategies depending on µ.
Solution:
If Player 2 plays L, Player 1 will always react with U in both games.
If Player 2 plays R, Player 1 will always react with D in both games.
⇒ Only possible equilibrium strategies are ((U, U ), L) and ((D, D), R).
Case 1: Player 1 plays U in both games
⇒ Player 2 must play L for an equilibrium to exist.
Eu2 (L) ≥ Eu2 (R)
⇔ 3µ + 2(1 − µ) ≥ 5(1 − µ)
1
⇔ µ≥
2
1
⇒ BNE1 : s∗ = ((U, U ), L), µ ≥
2
Page 2 of 5
Case 2: Player 1 plays D in both games
⇒ Player 2 must play R for an equilibrium to exist.
Eu2 (R) ≥ Eu2 (L)
⇔ µ + 2(1 − µ) ≥ 2µ
2
⇔ µ≤
3
2
⇒ BNE2 : s∗ = ((D, D), R), µ ≤
3
Problem 2: Signaling Game: Santa’s Dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Santa Claus S is delivering gifts on Christmas Eve and approaches on his flying sleigh
a remote house in the woods. In this house, there lives a kid K who is either a spoiled
brat (type ts ) or a good and kind child (type tg ). This type is private information
of the kid and not known by Santa Claus. He only knows that every forth child is a
spoiled brat. The child can decide whether to bake delicious chocolate cookies (C)
which Santa really likes or disgusting raisin cookies (R) which nobody really likes
(expect of grandma who has a weird taste). By her baking decision, the kid can send
a signal to Santa which he observes once entering the chimney and can thus possibly
reveal information about her type. After observing the cookie choice, Santa Claus
has to decide whether to give a gift to the child (G) or to keep the gift (N ).
Receiving a gift gives the kid a utility of 4 independent of her type. Since a good child
likes to be kind to Santa, she benefits from an additional utility of 1 when receiving
the gift after baking delicious chocolate cookies. In contrast, the spoiled brat enjoys
being mean and profits from an additional utility of 1 when receiving the gift after
choosing raisin cookies (remember: those are really inedible). Not receiving a gift
yields utility of 0 for any type, though having the possibility to eat some remaining
chocolate cookies still results in a small compensatory utility of 2.
In general, Santa Claus enjoys giving presents to good children (utility of 2), but
dislikes offering gifts to spoiled brats (utility of −2); not making any present yields
a utility of 0. If Santa gets to eat the delicious chocolate cookies, he profits from an
additional utility of 1 in either of the aforementioned cases.
Thus, the dynamic game be summarized in the following tree:
Page 3 of 5
4, −1 5, −2
G G′
(φ) C Kid ts R (π)
2, 1 N N′ 0, 0
1/4 spoiled brat (ts )
Santa Claus Nature Santa Claus
3/4 good child (tg )
5, 3 4, 2
G G′
C R
(1 − φ) Kid tg (1 − π)
2, 1 N N′ 0, 0
a. Check whether this game has a separating perfect Bayesian equilibrium of the
following form:
Good children tg bake chocolate cookies C and spoiled brats ts bake raisin
cookies R
Santa Claus responds to chocolate cookies C by giving the gift (G), but
decides to keep the gift (N ′ ) when observing raisin cookies R
Solution:
Step 1: Santa Claus’ beliefs:
φ=0 π=1
1−φ=1 1−π =0
Step 2: Best response of Santa Claus, given his beliefs:
)
EUS (G, C) = 3
⇒ BRS (C) = G ✓
EUS (N, C) = 1
)
EUS (G′ , R) = −2
′ ⇒ BRS (R) = N ′ ✓
EUS (N , R) = 0
Step 3: Check whether the behavior of the kid is optimal:
)
EUK (C|tg ) = 5
⇒ s∗ (tg ) = C ✓
EUK (R|tg ) = 0
)
EUK (C|ts ) = 4
⇒ s∗ (ts ) = C E
EUK (R|ts ) = 0
⇒ Behavior of the kid not optimal (spoiled brat ts would deviate)!
⇒ There exists no such separating perfect Bayesian equilibrium.
Page 4 of 5
b. Does this game have any pooling perfect Bayesian equilibrium in which kids of
any type always bake chocolate cookies C? Show your analysis and, if such an
equilibrium exists, report it.
Solution:
Step 1: Santa Claus’ beliefs:
φ = 1/4 π arbitrary
1 − φ = 3/4
Step 2:
)
EUS (G, C) = 2
⇒ BRS (C) = G
EUS (N, C) = 1
Note that given this best response, good kids of type tg have no incentive to
deviate from playing C as they would be worse off when playing R in any
case. Moreover, for such a pooling equilibrium to exist, Santa Claus must
react on R with N ′ to ensure that kids of type ts have no incentive to deviate
either.
)
EUS (G′ , R) = −2π + 2(1 − π) 1
′ ⇒ BRS (R) = N ′ ⇔ π ≥
EUS (N , R) = 0 2
Step 3:
)
EUK (C|tg ) = 5
⇒ s∗ (tg ) = C ✓
EUK (R|tg ) = 0
)
EUK (C|ts ) = 4
⇒ s∗ (ts ) = C ✓
EUK (R|ts ) = 0
⇒ Behavior of the kid is optimal for the out-of-equilibrium belief π ≥ 21 .
The pooling equilibrium is thus the following:
1 1
PBNE : σ ∗ = ((C, C) , (G, N ′ )) , φ = , π ≥
4 2
Page 5 of 5