Behavioral Game Theory

The recent killing of journalist James Foley has reignited the debate over paying hostage ransom demands. The US, British and many other governments have a clear policy of not paying ransom demands. Does that policy make sense?         The policy has a clear rationale in game theory. To see why consider the very stylized game below. The game begins with the kidnappers deciding whether or not to kidnap. If they kidnap then the hostage's representatives have to decide whether or not to pay the ransom. The numbers give the payoffs to the hostage takers and the hostage's representatives. If the hostage takers do not kidnap then payoffs are 0. If they kidnap and the ransom is paid 100 is transferred from the hostage's representatives to the hostages. If they kidnap and the ransom is not paid then the hostage takers pay some small cost of 10 while the hostage's representatives pay a big cost of 200.                The payoffs in the game are clearly somewhat arbitr

Petrol prices are one of the more interesting and accessible examples of demand and supply at work. With prices written in bright luminescent letters by the roadside it is a simple task, while driving along, to appreciate the variety of prices on offer. And an interesting economic problem to try and explain that variation in price.          A recent road trip gave us chance to compare prices  in a few European countries. It was pretty obvious that prices were higher in Germany than in Austria or Switzerland and higher in Austria and Switzerland than in Luxembourg. These broad differences primarily reflect differences in tax . What I found interesting, however, was that German prices appeared to be squeezed near the borders with Austria and Luxembourg. Anecdotally, at least, it seemed that prices got lower the closer we got to the border. If true, that would be a very nice example of tax incidence at play.         Tax incidence is a fantastic economic concept. But it is also very p