Having notational ease, we suppresses enough time subscript of these reputation-upgrading attributes

Having notational ease, we suppresses enough time subscript of these reputation-upgrading attributes

Definition step one. The newest https://www.datingranking.net/seniorpeoplemeet-review harmony inside our design was a good Markov Finest Harmony for example you to, at every months t , new proper RA always.

I find a good Markov Primary Harmony in the sense one to the newest equilibrium is “memoryless,” that is, the techniques of the proper RA just utilizes the present day reputation for the adversary and you can by itself. The balance is even “symmetrical,” since method purpose of both RAs (if they are each other strategic) is the same. Although not, the brand new RAs do not bring tips at exactly the same time.

Let RA1 be a strategic RA and let Vt(q1, q2) denote its discounted future profits, given its reputation q1 and its competitor’s reputation q2 , and let ? be the discount rate. The RA’s new reputation after it gives NR and the failure of a project following a GR are denoted by and , respectively. A successful project with a GR leaves the RA’s reputation unchanged. Note that and are functions of the strategy of the RA and its current reputation level.

The objective function of RA1 is to maximize Vt(q1, q2) , the strategy being x1 . Note that, RA1’s strategy is only effectual when it rates a bad project. In all other cases, RA1’s strategy is inconsequential.

So you’re able to obtain a logical choice to this video game, i generate a good simplifying presumption you to definitely p

Proposition 1. There exists a unique x1 , where 0 ? x1 ? 1 , given that Vt(q1, q2) is an increasing function in q1 .

Intuitively, it is easy to see from Equation (8) that Vt(q1, q2) is linear in x1 . This ensures that RA1’s maximization problem has a unique solution.

Suggestion 2 ensures that a strategic RA constantly provides GR to a great investment. It is because it becomes a lower spend-regarding whether it deviates using this method and provide a good NR so you’re able to an excellent opportunity. Brand new suggestion follows right from brand new pay-off design of RAs plus the philosophy.

Corollary 1. Assume pG < 1 . Then the equilibrium strategy of the strategic RA is always positive, that is, it inflates ratings with positive probability.

Corollary dos. Assume the fresh design results in several months T. Then equilibrium means of one’s strategic RA are x = 1 within t = T ? step 1, T .

We now introduce a logical services when you look at the a restricted months means. We resolve the brand new model numerically inside infinite panorama for the Part 5.

4 Limited Views Service

We imagine the latest design lasts for around three attacks, t = step one,2,step 3 , plus the RAs optimize the asked full money over the around three periods. I calculate this new balance strategy of the RAs having fun with backward induction. I already know just that proper RA are always lay within the the past two attacks, since found inside Corollary 2.

As described in Section 3, we look for an equilibrium of the game by examining the trade-off facing RA1, that is, the difference between expressions (9) and (10). If the pay-off from lying is greater then x1 = 1 , and we have a pure-strategy equilibrium in which RA1 always lies; if the pay-off from not lying is greater then x1 = 0 and we have a pure-strategy equilibrium in which RA1 never lies; otherwise, we have a mixed-strategy equilibrium in which RA1 is indifferent between lying and not lying, given some prior beliefs about its strategy, that is, 0 < x1 < 1 .

G = 1 and ? = 1 . This assumption implies that the reputation of the strategic RA goes to zero if it gives a GR to a bad project since now every good project succeeds and every bad project fails. This simplifies expressions (9) and (10) and allows us to derive the equilibrium strategy of RA1. This assumption is relaxed in Section 5.

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