Question: Player 1, the "government," wishes to influence the choice of player 2. Player 2 chooses an action a2 ? A2 = {0, 1} and receives a transfer t ? T = {0, 1} from the government, which observes a2. Player 2's objective is to maximize the expected value of his transfer, minus the cost of his action, which is 0 for a2 = 0 and for a2 = 1. Player 1's objective is to minimize the sum 2(a2 - 1)2 + t. Before player 2 chooses his action, the government can announce a transfer rule t(a2).

(a) Draw the extensive form for the case where the government an-nouncement is not binding and has no effect on payoffs.

(b) Draw the extensive form for the case where the government is con-strained to implement the transfer rule it announced.

(c) Give the strategic forms for both games.

(d) Characterize the subgame-perfect equilibria of the two games.