lecture 11 Flashcards

1
Q

how to measure inequality in a society?

A

a common tool is
the lorenz curve → graphical representation of how much of total income (or weath) a certain proportion of the population has.
* poorest to the richest (x axis)
* cumulative share of population, ordered by increasing income, versus the cumulative share of income

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2
Q

how to get the perfect equality line?

A
  • no inequality in the country
  • each member of the population owned an equal share of land (45º in lorenz curve)
  • everyone is equally poor or rich
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3
Q

what is the gini coefficient?

A

it is a measure of the area below the 45º angle line above the lorenz curve
- distance between the lorenz curve and the perfect equality line
- measured between 0 and 1
- gini= (A):(A+B)
where:
A → This area lies between the Lorenz curve (the curved line) and the line of perfect equality (the diagonal line from the origin to the top right corner).
B → This area lies below the line of perfect equality, forming a right triangle.

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4
Q

what happens if gini=0 or =1

A

when
=0 → there is no inequality
=1 → a single individual has all the income

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5
Q

what is a firm?

A

business organization (legal entity) which pays wages and salaries to employ people, and purchases inputs to produce market goods and services with the intention of making a profit

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6
Q

explain the relations within a firm

A

a firm is a place of interactions among different economic agents
- owners
- managers
- employees
each agent has their own goals and optimal choices to make

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7
Q

is there a conflict of interest between firms and workers?

A

there MAY be, bc
If the firm’s profits increase because managers or employees put a lot of effort and did a terrific job, who would benefit?
* The owners would benefit, since they are entitled to the firm’s profits
* If employees (and managers) only receive a fixed wage or salary, they would notbenefit
* No gain, despite being the agents who put it more effort (that is, the increase in profits was
due to their effort)
* They would benefit if they receive a promotion, bonus, or a pay raise

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8
Q

what can be an hidden action problem of the firms?

A

workers’ actions are not fully observable
- the work contract cannot condition wages on effort

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9
Q

what do you have to set up a work contract?

A

We have:
* Conflicts of interest between the firm and workers
* Asymmetry of information
* Need to motivate workers to “work hard”

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10
Q

how to set up a work contract?

A

principal-agent model→ model what we have as a principal (the employer) interacting with an agent (the employee)

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11
Q

what is the hiring process?

A
  • the employment contract cannot predict all contingencies
  • it is costly/impossible for the firm to observe the worker’s effort
  • even if the firm could perfectly foresee the future and observe each worker’s efforts, an enforceable contract would be imossible to write
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12
Q

what is a contract?

A

a legal documetn or understanding that specifies a set of actions that parties to the contract must under undertake

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13
Q

what is an incomplete contract?

A

cannot specify, in an enforceable way, every aspect of the exchange tat effects the interests of the parties

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14
Q

what will work contract be?

A

incomplete, as they cannot predict all possible contingencies of the future and write who should do what in each of them

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15
Q

what is a piece-rate contract?

A

worker receive some payment per unit produced
it is used to provide workers an incentive to exert effort, because employees’ pay increases if they produce more

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16
Q

what is an employment rent?

A

the economic rent a worker receives when the net value of ther job exceeds the net value of her next best alternative

17
Q

what determines employment rent?

A
  • how the worker evaluates her pay, which is something she valyes (↑ utility level)
  • how hard she workks, since working gives her a disutility level
  • how she evaluates her outside option
18
Q

what is a disutility of work?

A

unpleasantness of going to work and working hard all day
it depends on howm much effort she puts in her job

19
Q

what is the formula of total employment rent (TEM)?

A

TEM= employment rent per hour * expected hours of lost work time

20
Q

what is the formula of total employment rent per hour (TEMH)?

A

TEMH= hourly wage - disutility of work - net value of outside option (reservation wage)

21
Q

why does employment rent matter?

A
  • employment rent can be used to motivate workers to exert effort at work