The American Economy - Midterm Key Terms

decentralized mechanism/system

voluntary, there is no single centralized authority that makes decisions on behalf of all the parties, example: violence, markets

centralized mechanisms/systems

centralized organization, all members are bound by the decision, example: the state, labor union

game theory

rational actors interacting voluntarily

equilibrium in game theory

existence, uniqueness, optimality

simple coordination game

does not have uniqueness, both parties are different about equilibrium, solution: 3rd party enforcement, signaling, communication

Prisoner’s Dilemma

does not have optimality, solution: 3rd party enforcement, monetary enforcement

Battle of the Sexes

does not have uniqueness, communication is more costly

collective action

when a group of individuals pursues some common interest/shared objective where there is some cost to that pursuit, advantage: give sustained attention to an issue

interest groups

organized groups of citizens where one of whose goals is to advocate for a certain policy

free rider problem

individual reaps same benefits without paying cost, may result in not achieving the goal, captured by the Prisoner’s Dilemma

multiple goal problem

there are multiple equilibria, becomes more problematic when n rises, captured by simple coordination

conflicting goals problem

some people prefer certain outcomes than others, better off cooperating, captured by B of S

costs of cooperation

enforcement, communication, monitoring

privilege groups

smaller groups, have an easier time overcoming collective action

advantages of privilege groups

monitoring becomes enforcement, number of conflicting goals is smaller, communication is easier

byproduct theory

large groups form as a byproduct of selective incentives that the group can just give to its paying members

how to measure consumer demand

personal income, personal expenditures, savings

categories of expenditure

durable goods, nondurable goods, services

durable goods

products that last over 3 years, expensive, must be financed and therefore may be affected by interest rates, 13% of all spending

nondurable goods

products that last under 3 years, 30% of all spending

services

around 60% of all spending

how to measure the size of a business

contribution to GDP, employment, trends over time

3 biggest business sectors

services (79.5%), industry (19.4%), agriculture (1.1%)

structure of a sector

business-specific lobbies, industry-wide association, economy-wide association

business-specific lobbies

represents the interests of a single company or organization, works to influence legislation or regulation that impacts that specific business

industry-wide association

represents the interests of all businesses within a particular industry, works to shape legislation or regulation that affects the entire sector, example: American Petroleum Institute

economy-wide association

represents the interests of businesses across multiple sectors, addresses broader economic issues that impact the overall business environment, example: US Chamber of Commerce

economic features of labor market

productivity, per capita income, standard of living, unemployment, wages

productivity

output per worker; increases due to changes in technology, capital decreasing over time, investment in human capital

per capita income

average labor productivity x aggregate labor force participation rate

standard of living

f(productivity/ average worker, size of labor force/population)

labor force

employed persons or those seeking employment

variables affected by labor force participation rate

decline in fertility rates, decrease in child labor, increased participation by women, immigration, longevity, decrease in labor force participation by adult males of working age

why labor is different than other inputs of production

labor determines a large aspect of a human being’s life, bargaining power of individual sellers (workers) is weaker than those of individual buyers (firms), voluntary effort is required for optimal production, workers enter an authoritarian relationship with their employers, large scale unemployment can lead to social upheaval

unions

monopolistic representation of workers at a workplace

private sector unions

business in private sector want to keep costs as low as possible

public sector unions

usually responsible for electing individual, tax payer money

Wagner Act 1935

created agency shops, workers could not be fired, replacements could be hired to keep business in operation, lockouts were allowed for contract negotiation purposes but not to stop unionization

agency shops

if a union exists at a workplace, a new hire automatically gets their dues deducted, solves free rider problem

Taft-Hartley

creates right-to-work laws

right-to-work laws

choice to opt out of Wagner provision act, states were given the power to ban closed shops, no strikes allowed to put pressure on firms to allow unions, lowered penalties for interfering with unionization, reintroduces free rider problem

labor organization

local levels, industry-wide, economy-wide

examples of local levels (labor)

unions or local chapters of unions

examples of industry-wide (labor)

Iron Workers of America

examples of economy-wide (labor)

AFL-CIO

rent seeking

pursuit of excess profits above market payoffs that the government can create through legislation and regulation

rent

unproductive use of resources, not Pareto efficient

examples of rents

tariffs, subsidies, tax breaks, regulation exemptions, bailouts, labor regulations, licenses, naming of products

costs of rent seeking

efforts and expenditures of potential recipients of the rent, efforts of government officials to obtain or react to the efforts and expenditures of potential recipients, 3rd party distortions induced by the rent-seeking activities

examples of rent seeking

lobbying, campaign contributions, providing info and expertise, delivering votes, use of economic power, litigation, bribes

PACs

parts of interest groups or entities that contribute to campaigns

types of campaign contributions

corporate, labor, trade associations, unconnected, super PACs

hard money

limited contribution, goes directly to candidates

soft money

unlimited contribution, goes to political parties

criteria for good decision-making

rational individuals, universal admissibility, Pareto optimality, independence of irrelevant alternatives, nondictatorship

Arrow’s Impossibility Theorem

there exists no decision-making mechanism for translating the preferences for rational individuals into a rational/coherent group preference that simultaneously satisfies all 5 conditions, solved by value restricting universal admissibility

value restricting

one option cannot be the worst

decision-making mechanisms

dictatorship, random, vote

single-peaked preferences

the alternatives under considerations can be represented as points on a line, and each of the utility functions representing preferences over these alternatives has a maximum at some point on the line and slopes away from this maximum on either side

Median Voter Theorem

if the members of a group have single-peaked preferences, then the ideal position of the median voter cannot be beaten

Downsian Model

applied MVT to 2 party majoritarian elections, politicians: maximize votes, voters: maximize their ideal policy positions, equilibrium: policy platforms of the 2 parties will converge and reflect the median voter’s ideal preferences

criteria of a good theory

falsifiability, high explanatory power, high explanatory range, high predictive power, parsimony

Principal-Agent Model

where the principal (voters) delegates tasks to the agent (politicians) for execution, equilibrium: the damage to the economy is greater than the gain to the rent-seeker, because monitoring costs are too high for the principal, types of laws: benefits are concentrated to a few and costs are dispersed for everyone

Olson’s Theory

small group has an advantage in rent-seeking, equilibrium: the damage to the economy is greater than the gain to the rent-seeker, because not all interest groups are the same, large groups cannot adequately counter privileged groups

shirking

situation where the agent does not put forth the agreed-upon effort in carrying out their responsibilities, typically occurs because the agent's interests may not fully align with those of the principal and the principal cannot perfectly monitor the agent's actions

ex-ante examples

careful screening based on reputation

ex-post examples

monitoring, performance-based pay, other monetary incentives

when free-riding is irrelevant

n= K or when k is very small

US Chamber of Commerce

largest business advocacy organization in the US, represents companies of all sizes by lobbying for pro-business policies, conducting research, and providing legal support, promotes economic growth, free trade, and a favorable regulatory environment

collective bargaining

process through which a group of employees (usually represented by a union) negotiates with their employer to establish the terms and conditions of employment, can include discussions on wages, working hours, benefits, job security, workplace safety, and other work-related issues