The Extensive Form of a Game

! Repeated game example: Wage setting ! Extensive form of a game ! Information sets Example: Wage setting ! Stage game ! One firm, one worker ! The firm offers the worker a wage, w ! The worker accepts or rejects the firm's offer ! Reject: the worker becomes self-employed at wage w 0 ! Accept: Work (disutility e), or Shirk (disutility 0) ! If the worker works (supplies effort): Output is high=y ! If the worker shirks: Output is high with probability p, and low=0 with probability 1-p ! The firm does not observe the worker's effort decision ! The output of the worker is observed by both parties