Incentives and Behaviours

Question 1

Perverse Incentives

Answer 1

International financial institutions are criticised for their short-term incentives provided by the bonus structure

Question 2

Levitt and Dubner

Answer 2

• Incentives are cornerstones to modern life
• Conventional wisdom is often wrong
• Dramatic effects often have distant causes
• Experts use informational advantages to serve their own agenda and this doesnt always have the customers best interest

Question 3

Incentives and Cheating

Answer 3

Levitt - Teachers need students to get good grades (their jobs depend on it) - teachers sometimes change the answers to multiple choice questions (5%) found

Question 4

A Corollary

Answer 4

Things that are highly distributed and on either end of the spectrum
- Those that are on the lower end stay for the expectation that they could go on the other end. (Footballers)

Question 5

Asymmetric Information

Answer 5

Some participates in economic transactions have access to more or better information than other participants.
- If incentive structures aren’t inappropriately designed, expertise can be used to worsen outcome for clients
E.g. - real estate = selling too high or too low

Question 6

Causality

Answer 6

Are two two variables causalities are correlative to one another?
- Causality- e.g. legislation on abortion in the 60s and 70s - usually single mums with low incomes get abortion therefore the legalisation shouldve declined crime rates in the 90s.

Question 7

Industrial Organisation

Answer 7

The idea that ganga are more like modern run businesses operated like franchises than being a chaotic organisation
- The ‘Black Disciples’ in Chicago = run by 20 individuals with around 100 franchises throughout Chicago
- ‘JT’ branch- would give 20% of revenue from crack to directors
- 3 officers worked for him: enforcer (for safety), treasurer and a runner
- below was many other people, the system was a hierarchy

Question 8

Drug Account from Chicago

Answer 8

Revenue Total: $32k
Costs: non-wages: $14k
Wages for 3 officers: $2.1k
Wages of the foot soldiers: $7.4k
Payment for JT: $8.5k

Question 9

Importance of Incentives

Answer 9

They act as a driving force
- Incentives MUST be well designed if the results are not to be perverse
- There’s many other examples where free markets don’t generate social optimum outcomes.