104 Flashcards
how people’s taste for risk
affects their choice among options (investments, career
choices, consumption bundles) with uncertain outcomes.
Expected Utility Theory
The amount that a risk-averse person would pay to avoid taking a risk. For example, an individual may buy insurance to avoid risk.
Risk Premium
In a perfectly competitive market there are…
no transaction costs
Name some of the reasons for market failure
- Asymmetric Information
- Externalities
- Economies of Scale
can be broadly defined as the costs that arise
from the implementation and usage of institutions.
Transaction Costs
Deviation from economic rationality. Definition by Herbert A. Simon (1957):
“ agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information
Bounded Rationality
Contracts cannot specify the behavior for every possible situation, thus they are…
Incomplete Contracts, which result in follow-up problems.
hold-up problem is central to the theory of incomplete contracts and shows the difficulty in writing complete contracts.
Reasons for incomplete contracts:
- Ex-post surprises
- Very high negotiation costs
- Very high enforcement costs
- Loopholes
Value of transaction-specific investment minus value of the second-best transaction-specific investment
Quasi-rent
Vertical intregration vs Horizotal.
Vertical integration would be buying the seller of parts, horizontal would be buying another similar company to what you do(comcast buying time warner)
Situation in which one party to a transaction has relevant
information that another party does not have
asymmetric information
Two types of asymmetric information:
Hidden action(endogenous) - Agent can take unobserved actions. 2. Hidden information (exogenous) - Agent has information on important characteristics or states of nature, which the principal does not have.
Problem arising when agents (e.g., seller of a product or firm’s managers) pursue their own goals rather than the goals of principals (e.g., the buyer of the product or the firm’s owners).
principal–agent problem
Opportunism characterized by an informed person’s taking advantage of a less-informed person through an unobserved action.
moral hazard
Form of market failure resulting when different qualities are sold at a single price
because of asymmetric information.
adverse selection
incentive compatibility constraint
A’s expected net income resulting from eH must be at least as high as the expected net income resulting from eL.
A return received in an activity that is in excess of the minimum needed to attract the resources to that activity.
Rent
Process by which sellers send signals to buyers conveying
information about product quality.
market signaling
-Example: Job Market
Action by either a producer or a consumer which affects other producers or consumers, but is not accounted for in the market price.
externality
Principle that when parties can bargain without (transaction) costs and to their mutual
advantage, the resulting outcome will be efficient regardless of how property rights are
specified. Ex-post we can always reach Pareto-efficient allocations.
Coase theorem
Game theory example in which two parties must make a decision; if they both work together and choose the best desision that they profit the most, but if one doesn’t, he suffers so they both choose the worst option.
prisoners’ dilemma
dominant strategy
Strategy that is optimal no matter what an opponent does.
Set of strategies or actions in which each player does
the best it can given its competitors’ actions.
Nash equilibrium
Vertical Problems vs Horizontal Problems:
Vertical is between corporative actors at different hierarchy levels, Horizontal is at the same hierarchy level
