Question

Question 2. This game is about a negotiation between an author and a publisher. We present only the stylized game, but we imagine that you will be able to think of many real- world contract negotiations that look like the game here The author has to choose between putting a lot of effort into the writing of her book, and making less effort. The publisher has to choose between aggressively promoting the book, and leaving the book to sell itself. Each player has to decide without knowing the other player's decision. Some plausible payoffs are given in the matrix below Publlsher Prom No 3 0 Author 3 0 NW 0 Note that this is a coordination game. The best outcome for both players is if the author works hard and the publisher promotes aggressively. But, if either player makes the opposite choice, then so should the other; and both end up worse off. Now add a prior choice available to the publisher, which is to pay an "advance" to the author. The advance, if paid, results in a payoff of to the author (over and above her existing payoffs), and costs the publisher the same amount. The new game tree is depicted below Publisher No Advance Advance Publisher Publisher Prom Prom Author NW NW

Q: What inference do you think the author might draw from a decision by the publisher to pay an advance? What strategy—work hard or not—do you think the author would then adopt? What are the implications for the publisher? Is there a sense in which the publisher, in deciding to pay an advance, is sending a signal to the author? Is sending this signal a good idea?

Answer 1

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