Topical Teaching: Greek Debt Crisis & the Bargaining Game

It is no secret that current events offer the economics instructor a great way to motivate and teach economic concepts and models. Few stories have dominated news coverage like the Greek debt crisis. MobLab’s Bargaining Game is a powerful way to frame a discussion of the bargaining impasse at the heart of this crisis.

MobLab’s Bargaining Game implements Rubinstein’s classic bargaining model. Two students make alternating offers on how to divide a surplus. Making things interesting is the fact that this surplus decreases each time an offer is rejected. Especially as your students gain experience, many groups will reach an immediate agreement. With game play and the environment fresh in their minds, this is a great opportunity to do the backward induction and solve for the Nash equilibrium.

Without a doubt, many of your students will fail to agree quickly and see the dividable surplus shrink with each rejection. This is a great teaching opportunity! Ask your students about their preferences and strategies. You will certainly hear about preferences for both fairness and “winning”. Students will bring up risk preferences. You might even hear about hoping to take advantage of less sophisticated partners (common knowledge!) as well as a desire to build a reputation. While I hope you point out that there are no reputations in the game they just played, it is yet another potentially salient difference between the impasse in Europe (and in the game play of many of your students) and a model predicting an immediate agreement.

Getting students to not only solve the model, but to also understand the underlying assumptions. Focusing on how the Greek debt negotiations might differ from these underlying assumptions in an attempt to explain why the impasse. As an instructor, I would call it a good day’s work.

See Greece’s latest offer in this continuing saga: Greece Requests a 3-Year Loan but Is Vague on Its Financial Plans