Reference no: EM132201171

Question: Suppose two business partners get together and they consider a project. The partner B has an established reputation for being reliable, but the partner A does not. B initially believes that A is reliable with probability 1/2. A knows his own type. If the project goes through and A is reliable, both parties earn 2. If the project goes through and A is unreliable, then A gains 1 and B loses 1 from it (think of A simply stealing the money). If the project does not go through, neither party earns anything from the project. The process of negotiation goes as follows. First, A has an opportunity to signal by taking an action (having a downtown office location, taking the business partner for an expensive dinner/trip, etc.) that costs it x from the interval [0, 2]. Second, B decides whether the project goes through or not. Give an example of an equilibrium (how much x is chosen by the reliable A and how much x is chosen by the unreliable A) in which B is able to distinguish the type of A from the amount of x.