unit 5 Flashcards
what are institutions (4)
Institutions: both unwritten and written rules that governed the interactions among players (rules of the game)
Institutions provide both constraints and incentives
- Institutions are the “rules of the game”.
- They govern the interactions between individuals.
- They provide the constraints and the incentives.
- They specify who can do what, when they can do it, and how
the actions of players (in game theory terminology) affect
their payoffs.
what is power
Power is the ability to do and get the things we want in opposition to the intentions of others.
what are the two forms of power
Structural power
Bargaining power
what is structural power
a person’s structural power is the value of their next best alternative.
A person’s structural power is limited by the structural power of the other.
what is bargaining power
A person exercising bargaining power may set
the terms of an exchange and/or impose, or threaten to impose,
heavy costs.
how can you evaluate institutions and outcomes
assess the allocation according to the Pareto criterion and Pareto
efficiency.
A second important criterion is fairness.
why may an allocation be seen as unfair?
How unequal the allocations are: In terms of income, for example, or subjective wellbeing. These are called substantive judgements of fairness.
How the allocations came about: For example, by force, or by competition on a level playing field. These are called procedural judgements of fairness.
in what aspects may the rules of the game be evaluated?
Legitimacy of voluntary exchange: Were the actions resulting in the allocation the result of freely chosen actions by the individuals involved? Or was fraud or force involved?
Equal opportunity: Did people have an equal opportunity to acquire a large share
of the total to be divided up?
Deservingness: Did the rules of the game that determined the allocation take account of the extent to which an individual worked hard, or otherwise upheld social norms?
what is the Rawlsian approach to evaluate institutions fairness
Justice is impartial: fairness applies to all people
Imagine a veil of ignorance
From behind the veil of ignorance we can make a judgement
why may the ultimatum game be judged as procedurally fair? (4)
The prospers are chosen at random
The game is played anonymously
Discrimination is not possible
All actions are voluntary
what remains the same in the Angela and Bruno situation as institutions differ
preferences and technology used to produce grain
what does angel want
The best-for-her feasible combination of grain and free time, according to her preferences
what does bruno want
As much grain as possible
facts about angels indifference curves/ preferences
her indifference curves are vertical shifts of each other this means:
- that the vertical distance between two curves is the same whatever her amount of free time
- for each level of free time, the slope is the same on every indifference curve: Angela’s MRS depends on the amount of free time she has, but does not change if she receives more or less grain
what is the production function
the input (x-axis) creates the output (y-axis)
it has a concave shape: the average product for an hour’s work diminishes as the number of hours increases. This happens because the amount of land is fixed and becomes overworked.
