lecture 11 Flashcards
how to measure inequality in a society?
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
how to get the perfect equality line?
- 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
what is the gini coefficient?
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.
what happens if gini=0 or =1
when
=0 → there is no inequality
=1 → a single individual has all the income
what is a firm?
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
explain the relations within a firm
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
is there a conflict of interest between firms and workers?
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
what can be an hidden action problem of the firms?
workers’ actions are not fully observable
- the work contract cannot condition wages on effort
what do you have to set up a work contract?
We have:
* Conflicts of interest between the firm and workers
* Asymmetry of information
* Need to motivate workers to “work hard”
how to set up a work contract?
principal-agent model→ model what we have as a principal (the employer) interacting with an agent (the employee)
what is the hiring process?
- 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
what is a contract?
a legal documetn or understanding that specifies a set of actions that parties to the contract must under undertake
what is an incomplete contract?
cannot specify, in an enforceable way, every aspect of the exchange tat effects the interests of the parties
what will work contract be?
incomplete, as they cannot predict all possible contingencies of the future and write who should do what in each of them
what is a piece-rate contract?
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
