Chinese
 Exchange student from Peking University
 Not first time to US, But first time as a
student
 Please point out my problems not only
during this presentation but daily life
 Hope to become friends with all of you

Yu Shi 9/27/12 Econ 400M
Special Style: Socialist market economy
 To make most of the market, lots of state-owned
businesses are privatized
 Definition of a state-owned business

› owned by the government, but is run by an individual
› most of the profit should be given to the government,
and the government handles with the entire deficit,
while the manager has no economics responsibility
› What the manager can do?
Yu Shi 9/27/12 Econ 400M
 Players?
 Strategies?
› Government
› Manager
 Legal?
 Illegal?
 How many times?
 What do they know?
Yu Shi 9/27/12 Econ 400M
Promising situation (the basic profit reflects
on a pay-off of +2).
 Not in a key industry as energy or resources
etc.
 the manager is not good at operating a
company, and treasures leisure more than
the output by working (the extra profit the
manager can make by working hard is +0.5,
which should be added to the
government’s pay-off; while giving up the
leisure ends up with a -1 for the manager).

Yu Shi 9/27/12 Econ 400M
 The
government never know what
the manager is doing.
 The buyer knows exactly the true
value of the business.
 The government sells the business
based on the profit reported.
 The government are willing to see
the business running in a more
efficient way (the pay-off for
government is +2).
Yu Shi 9/27/12 Econ 400M
The buyer of a company will replace
the manager (pay-off is -1for manager
if being fired) unless he works hard and
reports all profit.
 Specially, for the case (S&R, privatize),
the manager’s pay-off is added by 2
 If the manager cheats on reporting the
profit, he may be put into jail if being
caught (with pay-off of -5 for NS&NR,
and -7 for S&NR). The government’s
reputation may be affected (a pay-off
of -3).

Yu Shi 9/27/12 Econ 400M
Manager
NS&NR
NS&R
S&NR
S&R
Government
Privatize
Not
Privatize
(-6, -1)
(4, 0)
(-1, 4)
(2, 2)
(-8, -1)
(3.5, 0)
(3, 5)
(1, 2.5)
Yu Shi 9/27/12 Econ 400M
 20
people; 10 pairs.
 Make sure everyone fully understand
Column
the information
Left
Right
 The
game is Top
stopped (-6,
if the
Row
-1) column
(4, 0)
Up left, or(-1,
4)
(2, 2)
player chooses
automatically
(-8, -1)
(3.5, 0)20
stopped if itBottom
is player for
more than
Down
(3, 5)
(1, 2.5)
rounds
 Stop the experiment when the data is
large enough.
Yu Shi 9/27/12 Econ 400M
Column
Left
Right
Row
 If
Top
Up
Bottom
Down
(-6, -1)
(-1, 4)
(-8, -1)
(3, 5)
(4, 0)
(2, 2)
(3.5, 0)
(1, 2.5)
both of the row and column players are
risk lovers, in the first round, the output is
going to be (top, left).
 If both of the row and column players are
risk averters, in the first round the output
is going to be (bottom, right).
Column
Left
Right
Row
 If
Top
Up
Bottom
Down
(-6, -1)
(-1, 4)
(-8, -1)
(3, 5)
(4, 0)
(2, 2)
(3.5, 0)
(1, 2.5)
the row player is a risk lover while the
column player is a risk averter, they are
going to end up with “Top, Right” until the
game is automatically stopped.
 If the row player is a risk averter while the
column player is a risk lover, they are
going to end up with “Bottom, Left” (PD).
Column
Left
Right
Row
 Usually
Top
Up
Bottom
Down
(-6, -1)
(-1, 4)
(-8, -1)
(3, 5)
(4, 0)
(2, 2)
(3.5, 0)
(1, 2.5)
government will not be a risk lover,
thus the game will always end up with a
NE, but may not with PD in some cases.
 Policy Suggestion?
The
Manager

Government moves first:
NS&NR
NS&R
The Manager
Privatize
NS&NR
NS&R
S&NR
S&R
The Government
Privatize
Not
Privatize
(-6, -1)
(4, 0)
(-1, 4)
(2, 2)
(-8, -1)
(3.5, 0)
(3, 5)
(1, 2.5)
(-1, -6)
(4, -1)
S&NR
S&R
(-1, -8)
Government
(5, 3)
(0, 4)
NS&NR
Not Privatize
NS&R
(2, 2)
The Manager
S&NR
S&R (0, 3.5)
(2.5, 1)
Yu Shi 9/27/12 Econ 400M
The
Manager

Manager moves first:
P
Government
(-6, -1)
NP
(-2, 0)
NS&NR
NS&R
The
Manager
NS&NR
NS&R
S&NR
S&R
P
NP
Government
S&NR
S&R
Government
Government
P
NP
The Government
Privatize
Not
Privatize
(-6, -1)
(4, 0)
(-1, 4)
(2, 2)
(-8, -1)
(3.5, 0)
(3, 5)
(1, 2.5)
P
(-1, 4)
(1, 2)
(-8, -1)
NP
(3, 5) (-4.5, 0)
(1, 2.5)
Yu Shi 9/27/12 Econ 400M

Lose efficiency!
The Government
P
NP
The
Manager

NS&NR
NS&R
S&NR
S&R
(-6, -5)
(-1, 0)
(-8, -5)
(3, 1)
(4, 0)
(2, 2)
(3.5, 0)
(1, 2.5)
Policy suggestion?
Yu Shi 9/27/12 Econ 400M





Hung-Gay Fung, Donald Kummer and Jinjian Shen, 2006 “China’s
Privatization Reforms: Progress and Challenges”, The Chinese Economy,
vol. 39, no. 2, pp. 5–25.
Russell W. Cooper, Douglas V. DeJong, Robert Forsythe and Thomas
W. Ross. 1990. “Selection Criteria in Coordination Games: Some
Experimental Results”, The American Economic Review, Vol. 80, No. 1.
pp. 218-233
Stephen Philion, “Workers' Democracy vs. Privatization in China”,
Socialism and Democracy, Volume 21, Issue 2, 2007
Avinash Dixit and Susan Skeaty. 1999. Games of Strategy, W. W.
Norton & Company, Inc. pp.83-151
Russell W. Cooper. 1999. Coordination Games. Cambridge University
Press. pp. 1-18
Yu Shi 9/27/12 Econ 400M