econ175 midterm keyterms

what is economic’s definition of institution

social constraints shaping human behavior

what is the difference between rule of law and rule by law

rule of law = executive decisions can only be exercised in accordance with written and publicly disclosed laws and enforcement of laws follows well established procedures where no one is above laws vs rule by law = the ruler rules using arbitrary laws where the ruler is above the laws

what are the fundamental causes of informational problems and commitment problems?

information asymmetry, sequentiality of transaction

liberalization

loosening or removing restrictions in an economic system

privatization

transfer of government services or assets to the private sector

stabilization

the process of becoming or being made unlikely to fail or decline

formal vs informal institutions

codified, government enforced rules vs conventions, social norms, culture

how are institutions effective vs not

effective if complementary ex) social norm of honesty and legal punishment on corruptions vs tension if conflicting

what problems do institutions solve

informational problems, commitment, coordination, cooperation

what do informational problems come from

asymmetric information - seller always smarter than the buyer

how can institutions solve informational problems

formal institutions - disclosure rules, warranty, return policy, contracts, third party rating agencies vs informal - reputation

where do commitment problems come from

sequential transactions

how do institutions solve commitment problems

formal: binding/legal contracts informal: vertigal integration, witnesses

where to cooperation problems come from

inefficiency from self-interest maximization

nash equilibrium

both parties do not want to deviate from that strategy

how do institutions solve cooperation problems

formal: professional orgs, protection of civ rights; informal: social norms/reputation

where do coordination problems come from

the existence of multiple equilibria → the problem is from the dependence of people’s decision on other’s decision

how do institutions solve coordination problems

formal: rules/laws (traffic laws), informal: social norms - honesty and no corruption

According to Friedrich von Hayek, what is the weakness of planned economy?

Practical infeasability for a good plan - difficult to process information at the national level, in the long run, and informational and and incentive problem i.e. rachet effect

which system, presidential or parliamentary is it more likely to have a divided government and why

presidential bc the executive branch is elected by voters rather than appointed by the parliament majority

how do individualism and collectivism differ from each other

collectivism - interdependent self - identify self using the relationship with others; establishing self-esteem from conforming to norms, and positive judgement from others; individualism: independent self - identify self independently, establishing self-esteem from standing out from peers or forefathers e.g. try new things

the 2 ideal types of political institutions

autocracy - all power in one person or narrow group and democracy - power held by citizens through elections of representative government where citizens have fundamental rights freedom of expression, association, and migration

negative liberty vs positive liberty

free from coercions or interference vs free to achieve one’s purpose

culture

the set of values and beliefs about how nature and society work and the behavioral norms derived from the values and beliefs

What is the modernization theory?

during economic development, there is an increase of better education which leads to a higher demand for a more democratic way of government = correlation between personal income and level of democracy

what is the omitted variable in the modernization theory

culture

is the modernization theory valid? why?

after omitted other variables and just focusing on the core ideas, in Singapore there was virtually no change in the level of democracy as the income dramatically increased which is inconsistent with the modernization theory → the reality is that this theory is not the driving force towards more democracy

the main point of this course

not to find the objective truth but alter your way of thinking