EXTANT LITERATURE
The developments of literature on Game Theory in Economics in the past decade includes a few doctoral theses published by universities in the USA and Europe on topics such as the application of Game Theory to political and market institutions like Bouton (2009).
These are collections of by- and-large mutually exclusive essays such as Yang (2011), Maredia (2010), Nayyar (2009), Pimienta (2007) and Platz (2007). However, Gintis (2005) is an exception. Platz (2011) worked on cooperation with coalitions. Yang (2011) worked with, inter alia, coalition. Cooperation and coalition are applied to the Indian Bankers’ Association (IBA), which is discussed in this chapter in the section titled “Bargaining” in the context of successful bargaining. Allen and Morris (1998) worked with, inter alia, asset pricing and heterogeneous prior beliefs.Asset pricing is discussed regarding how the base rate obstructs loan pricing by causing failure in bargaining in the aforesaid section. Here, repeated interaction between the lender and the prospective borrower is considered. This is a case against Nayyar (2009) who explored how mutual help and cooperation are sustained through repeated interaction even when economic agents are completely self-interested beings. The shadow of heterogeneous prior beliefs is reflected in the Lemma deduced in the section titled, “NonCooperation and Cooperation.” Gintis (2005) worked with the rational actor model which is applied throughout the chapter. The decision tree of Maredia (2010) is applied in the section titled “Nash Equilibrium.” Pimienta (2007) employed equilibrium in non-cooperation which is applied in the sections “The Case of Duopoly” and “Nash Equilibrium.”
Cooter and Ulen (2004) applied Game Theory to Law and Economics in the topic ‘Settlement Bargaining’. It received succinct treatment in the context of the lender-borrower bargaining in this chapter.
In the previous decade, Allen and Morris (1998), Pindyck and Rubinfeld (1995), Shy (1995), and Gibbons (1992) are among the concise works. Shy (1995) is noteworthy in the context of imperfect market structures. Imperfect market structures of duopoly and oligopoly are applied here to obtain several important findings. The advantage of the first mover and the two stage game in Shy (1995) are applied in this chapter in the section titled “Nash Equilibrium.” Pindyck and Rubinfeld (1995) are applied to the “Prisoner’s Dilemma.” Similarly, Gravel and Rees (2004) are applied to bargaining. Gibbons (1992) dealt with strategies in imperfect market structures which are applied to lending business of the banks. Finally, Pindyck (2012) and Pindyck (2013) are unparallel in terms of depth, intelligibility and relevance to the topics in microeconomics such as the cost of new entry and the topics in financial economics such as the pricing of new investment options, respectively.This chapter seeks to add to game theory literature via the analysis of the decision making processes of:
1. The banks which lend funds to the business community and compete with themselves in the lending business; and
2. The business community which borrows such funds from the banks. A similar but shorter description of existing literature on economic application of game theory is found in Das and Wong (2013).
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