Lecture One (189 - 219) ... Institutions, Economic Growth and Nash Equilibriums Flashcards
what is Wagner’s law. hint: it’s tied to Tiebout Competition and Kuznets Curve
GDP per capita and government spending rise together
what are the explanations behind Wagner’s law, why does GDP per capita rise with government spending?
(there’s two different reasons)
- higher income people demand better infrastructure, public services, health insurance, unemployment insurance
- supply of government grows and stays big (difficult to shrink it, takes extra action to do so)
- this relates to hysteresis (historical stickiness)
why are people with the same skills richer and poorer in some countries vs. others?
more socially efficient institutions
(i.e. the country is more developed and encourages economic growth + free market competition)
what are the 3 routes that a country can take to grow
- crony capitalism (easiest for elites)
- communism, like USSR and Moaist China
- end mercantilism and adopt free mkts
what is the low-middle income trap that occurs in corrupt countries?
- relates to how businesses operate in these countries
few large firms (elite, protected by govt) dominate the mkt
small (illegal) firms survive by bribing corrupt rent-seeking police
what are institutions (economist’s definition)
things that constrain our self interested behavior
- can be formal or informal
difference between formal and informal institutions
formal: laws, regulations, contracts with fines and jail time as punishment
informal: cultural taboos, religious ideals, social norms with the punishment of embarrassment and social isolation
what is a socially efficient institution?
induces competition where competition moves the economy to a high-level equilibrium and prevents competition that leads to a suboptimal Nash equilibrium
the purpose of institutions is to
(these relate to optimal/suboptimal equilibriums)
keep us OUT of socially undesirable nash equil.
keep us IN socially desirable nash equil.
was Marx right about religion being the opium of the masses?
No!
religion can be an effective institution which keeps people out of socially undesirable nash equil.
ex-British colony effect
countries that were formerly colonies of Britain were more successful than French, Spanish and Turkish colonies
Public Choice Theory
(think of it as a Tiebout Competition for different religions)…
the idea that religions compete to have the most socially efficient institutions
- controversial topic that implies an evolutionary origin of religion
what’s the natural resources curse
countries with abundant natural resources grow more slowly and are more corrupt (on average) than similar countries without natural resources
why are natural resource economies more prone to corruption
political rent-seeking becomes simplified, all wealth is in one place
- for example, if a country has one large mine that produces precious metals (the country’s main export), then it is far easier to corrupt that one mine … all the wealth is essentially bottlenecked into the mine which allows political rent-seekers to choke the market until their compensated
is foreign aid an inhibitor to economic growth?
Evidence that foreign aid helps poor countries is statistically flawed
Foreign aid is simply moving money from poor people in rich countries to rich people in poor countries
diverts talent in these countries by attracting top talent to work for foreign aid agencies (highest wages)o
