Problem Set #4

An Escalation Game (10 points)

Sender

Quit Threaten

.2, .8 Target Leader

Back Down Escalate

1, .6 Sender

Give Up Fight

.1, .9 .15, .8

1
The Kidnappers Dilemma (20 points)
Suppose a hacker finds a security vulnerability in a computer that would allow him to lock its
owner out. Bricking the computer is this manner not inherently valuableand definitely not worth
commit- ting a crime overbut the hacker would want to capture the information if he could obtain
a ransom.

Thus, consider the following game with three moves. The hacker begins by deciding whether to lock
the computer in question. If he does, the target chooses whether to pay a ransom or not. Afterward,
the hacker decides whether to release control.

Hackers love a fair amount of chaos, so imagine that his most-to-least preferred outcomes are:
(hack, ransom paid, dont release), (hack, ransom paid, release), (dont hack), (hack, ransom not
paid, dont release), (hack, ransom not paid, release). The targets most-to-least preferred outcomes
are: (dont hack), (hack, ransom not paid, release), (hack, ransom paid, release), (hack, ransom not
paid, dont release), (hack, ransom paid, dont release).

a) Draw a game tree to represent this game, using payoffs that reflect the preferences

described. b) Find the games subgame perfect equilibria.

c) In practice, hackers play this sort of game with many targets over the course of a year rather
than the one-shot game described here. They also often go to great lengths to establish some
perverse goodwill with their victims, sometimes even establishing help lines to call if a victim is
unclear about payment instructions or is having difficulty with the ransom amount. Using what
you have learned from part (b), why do you think hackers provide these services?
Defending against Hackers(20 points)
Safe Horizons Security Corporation has two servers, A and B, that a hacker is trying to infiltrate. The
company has 80 units of effort to spend increasing the difficulty of hacking each of these servers. It
first choose an allocation of those 80 units. Afterward, the hacker sees the chosen allocation and picks
one of the servers to hack. If the hacker is successful in hacking the server she chooses, she receives 1.
Otherwise, she receives 0. The companys payoffs are flipped; it receives 1 if the hacker fails and 0 if
the hacker succeeds.

The chances of success depend on Safe Horizons initial defense allocation. Let x be the number
of units that the company invests in server A; thus, the number of units the company invests in
A equal x+20 . Server B is
server B is 80 x. Let the probability the hacker fails to hack server 100
less secure
than server A. As such, the probability of a failed hack equal 80x
100
.

a) Find the equilibrium allocation x.

b) Now suppose the company only has 30 units available to allocate to defense. Find the equilib-
rium allocation x under these conditions.

c) Using the answers to the above questions as guidance, substantively explain the goal of Safe Hori-
zons allocation decision.
Delegating Security(20 points)
A company has two nameless employees, impersonally referred to as Player 1 and Player 2.
The company needs its employees to install security updates to their system. As it currently stands,
both employees receive a payoff of 0 if neither installs the update. If an employee chooses to
install, he suffers -3 in time lost. However, because installing decreases the probability of a system-
wide hack, each player enjoys a value of +2 for each person who installs. Thus, if both players were
to install, the total payoff for each player would be 1.

Meanwhile, the company greatly values installation of the updateit gains +5 for each employee
who installs. To ensure compliance with its installation mandate, the company is thinking about
assigning someone from IT to install the software rather than wait to see if the employees will do it
for themselves. The ITs time is valuable, though, so it will cost the company -8 if it chooses this
route.

Conceptualize this interaction as an extensive form game. The game begins with the company de-
ciding whether to use IT for installation or instruct the employees to install it. If it opts for IT, the
game ends. If it instructs the employees, the employees then play a simultaneous move game to
decide whether to install.

a) Draw the game tree. You may suppose that the employees each receive a payoff of 4 if the
company delegates the IT professional to complete the installation.

b) Find the games subgame perfect equilibria.

c) Now suppose that the employees really dislike the IT professional invading their office space. As
such, they receive a payoff of -10 if the company chooses that route. Under these circumstances, can
the employees credibly commit to install the update? Why or why not?
Sincere Voting (10 points)
Nashlands parliament consists of three members, named 1, 2, and 3. They are choosing among three
bills to pass: A, B, and C. MP 1 prefers A to B to C. MP 2 prefers B to C to A. MP 3 prefers C to A
to B. Each player receive 1 for his most preferred outcome, 0 for the middle outcome, and -1 for the
least preferred outcome.

Parliamentary rules in Nashland require bills to be selected through an elimination gauntlet. First,
the MPs vote between A and B. The losing bill in that vote is eliminated. MPs then vote between
the first-round winner and C. The winner of the second-round vote is implemented.

Is sincere voting (i.e., always choosing your most preferred of two bills in every round) a subgame
perfect equilibrium?
Is Information Always Helpful? (20 points)
Consider a game that begins with a coin flip. The result is covered so that neither player observes
which side is facing up. Player 1 then chooses whether to quit the game or continue. Quitting
ends the game and gives 0 to both players. If he continues, player 2 chooses whether to call heads,
tails, or pass. If she passes, both earn 1. If she calls heads or tails, player 2 earns 3 for making the
correct call and -3 for making the incorrect call, while player 1 receive -1 regardless.

a) Draw the game tree. Because player 2 does not observe the result of the coin flip at the time
he moves, you should write player 2s expected payoff for choosing heads and his expected payoff for
choosing tails.

b) What is the subgame perfect equilibrium of this game?

c) Now suppose both players observe that the result of the coin flip is heads. Rewrite payoffs of
the game tree to reflect this new information. What is the subgame perfect equilibrium this time?

d) A common adage is the more information, the better. What do your answers to parts (b)
and (c) say about this?