PA 30 - Writing

Strategic Interaction

situations in which actors are surrounded by active decision-makers whose choices interact with theirs

Nash Equilibrium

a pure-strategy solution where no player can do better by unilaterally changing their strategy

Social Dilemma

a situation in which individually rational behavior leads to a collectively suboptimal outcome

Positive Externality

a spillover effect that enhances the wellbeing of others

Why are positive externalities undersupplied?

actors don’t internalize big social benefits

Negative Externality

a spillover effect that detracts from the wellbeing of others

Why are negative externalities oversupplied?

actors don’t internalize social costs

Public Goods

non-excludable + non-rivalrous

Commons

non-excludable + rivalrous

Policy solutions for positive externalities

Subsidize contributions; punish free-riding; make it easier to act

Policy solutions for negative externalities

taxes on externality-generating behavior; regulate + punish violators with fees (or shame)

What conditions invite tragedies of the commons?

(a) large group, (b) no communication, (c) no rights to resource (Ostrom)

Common-pool resource

yields finite flows of benefits where it is difficult + costly to exclude potential users

Policy solutions to common-pool resource problem

privatization, taxation, subsidies, regulation, self-organization

Tragedy of the Commons

individuals overuse of shared resources, which leads to collective detriment

Collective Action

when a large number of people work together to achieve some common objective

Collective Action Problem

individuals contribute too little to common objective because concentrated cost outweighs marginal benefit

Policy solutions to CAP

subsidies, make it easier to act, regulation

Strategic Complementarity

the benefit of taking an action is larger when other actors also that action, and vice-versaC

Pure Coordination Problem

equally advantageous equilibria

Distributional Coordination Problem

players favor different equilibria

Coordination Trap

one equilibrium Pareto dominates the other; generates social dilemma

Why are actors trapped?

expectations are self-fulfilling: neither actor wants to unilaterally deviate from the inefficient equilibrium, but they’d both be better off if they coordinated on the other equilibrium

Policy responses for coordination problems

communication, leadership, insurance; short-run interventions are sufficient

Communication

communicate decisions before choosing

Leadership

(re)setting expectations

Insurance

limiting downside to failed coordination

Whistleblower

someone who reveals unlawful or immoral acts occurring within an organization

Commitment Problem

occurs when there are ex-post incentives to defect from an agreement

Do commitment problems generate a social dilemma?

Yes - A could take some action that would benefit both A + B; BUT A anticipates that B will have power to exploit him, leaving A worse off relative to avoiding initial action. Ultimately, no deal and both players are worse off than if they both got what they wanted

Hold-Up Problem

a type of commitment problem where lack of credible commitment leads to inefficiently low levels of investment

Fundamental Problem of Exchange

unavoidable separation between quid and quo, and at least one party therefore may have the opportunity to cheat the other

Policy responses for commitment problems

create (in)formal institutions that allow players to credibly commit - limit acceptable choices by penalizing deceit (i.e. tying their hands)