Suppose Ann is working on a project with John. Both must decide whether to put i

Question

Suppose Ann is working on a project with John. Both must decide whether to put into a decent amount of effort into the project. Since Ann is the leader of the project, her contribution determines whether the project will be successful. If she puts into a decent amount of effort, the project will be finished on time and each will enjoy 3 units of benefit. If she decides not do so, the project will not be finished on time, neither one will get benefit. Suppose a decent amount of effort incurs a cost of 1 unit for each person. Please use the normal form represent the situation and identify the Nash Equilibrium if there is any. Would both be happy about the outcome and why?

Explanation / Answer

1. Ann puts in effort and John does not (3,3) 2. Ann and John both put in effort (1,1) 3. Ann does not put in effort (0,0) The Nash equilibrium is the situation in which Ann puts in effort and John does not. It has the highest total utility to all participants. However, Ann is likely to feel that her effort contribution was more important because she was leader of the project. She can do nothing to prevent John from benefiting from her work without reducing her own utility substantially. John is a free rider.

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