GAME THEORY X ROTTEN KID THEOREM

Rotten Kid Theorem

1. We start off with a wealthy family head. This head of the family is altruistic and wishes to give money to help his children.
2. Parents have perfect information about the welfare of their children.
3. Parents will use their wealth to compensate for any misfortune to their child.
4. Parents care equally about the happiness of each child.

With these assumptions, it is claimed that even if the family has a selfish, badly behaved child. The financial gifts from their parent give them an incentive to be well-behaved.

• If the selfish child, (Tom) was mean and unkind to their sibling (Wendy), Wendy would be worse off. For example, Tom destroyed all of Wendy’s toys.
• The altruistic parent would then offer additional help to Wendy (the sibling impoverished by the unkind actions of Tom). However, because the parents compensate his sister, his parents have less money and Tom would receive lower payments in the future.
• Therefore, Tom would gain less financial rewards from his parents if he was mean to his sister.
• If Tom knows the altruistic behaviour of his parents, then he has a financial incentive to be harmonious. If he creates problems in the family, he will lose out. The rotten kid learns to be harmonious to help maximise the total income of the family and therefore the total payments he will receive