Imagine the very relevant situation in developing countries where people can either decide to be law-abiding citizens or to engage in illegal activities. They would choose to be law-abiding citizens if there were a significant chance that they would be caught in the commission of a crime, but would engage in illegal activities if there were a low chance of being apprehended. The police have limited resources to fight crime, so the probability of being caught depends on the number of people engaged in illegal activities. If few people break the law, then the probability of being caught is high and it is preferable to be honest, but if many break the law, the probability is lower and there are more incentives to engage in illegal activities. How many potential equilibria could we arrive at in this example? Please describe the equilibria. Is this a coordination problem or a corporation problem? What is the main difference between the coordination problem and the corporation problem?

A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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Imagine the very relevant situation in developing countries where people can either decide to be law-abiding citizens or to engage in illegal
activities. They would choose to be law-abiding citizens if there were a significant chance that they would be caught in the commission of a crime,
but would engage in illegal activities if there were a low chance of being apprehended. The police have limited resources to fight crime, so the
probability of being caught depends on the number of people engaged in illegal activities. If few people break the law, then the probability of being
caught is high and it is preferable to be honest, but if many break the law, the probability is lower and there are more incentives to engage in illegal
activities.
How many potential equilibria could we arrive at in this example?
Please describe the equilibria.
Is this a coordination problem or a corporation problem?
What is the main difference between the coordination problem and the corporation problem?
Transcribed Image Text:Imagine the very relevant situation in developing countries where people can either decide to be law-abiding citizens or to engage in illegal activities. They would choose to be law-abiding citizens if there were a significant chance that they would be caught in the commission of a crime, but would engage in illegal activities if there were a low chance of being apprehended. The police have limited resources to fight crime, so the probability of being caught depends on the number of people engaged in illegal activities. If few people break the law, then the probability of being caught is high and it is preferable to be honest, but if many break the law, the probability is lower and there are more incentives to engage in illegal activities. How many potential equilibria could we arrive at in this example? Please describe the equilibria. Is this a coordination problem or a corporation problem? What is the main difference between the coordination problem and the corporation problem?
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