L9 - Institutions, concepts of fairness and pirates

Institutions

Set of laws and informal rules run at regulate social interactions between people

What do rules of the game determine

How the game is played

Size of payoffs

How payoffs are distributed

Power

Ability to get the things we want despite the interests of others

Structural power

Free exchange involves voluntary choice that improves outcomes relative to the next best alternative

The better the next alternative is the greater a players structural power, and therefore greater bargaining power

Dictator game

Eliminates responder power (veto) and it’s up to proposer to dictate split

Boost responder structural power

Guaranteed 40% payoff if they dislike an offer

Two important aspects of fairness

Substantive judgements - how evenly distributed an outcome is

Procedural - how allocation came about

Aspects to consider in procedural fairness

Voluntary exchange - free exchange of labour? Purchase or inheritance? Theft or coercion?

Equal opportunity - did everyone have an equal change to acquire their share? Education privilege?

Deservingness- did the allocation come from hard work and accordance with social norms?

Why do we judge the ultimatum game to be procedurally fair?

Random proposers

Played anonymously

Discrimination is impossible

Actions are voluntary

Does this mean the outcome of the game is substantively fair!

No

How can substantively fair outcomes come from procedurally unfair means?

Equal outcomes due to hard work and theft

John Rawls veil of ignorance argument

Judge societal fairness not knowing which position we might be born into

What issues can economics help to clarify

How aspects of fairness are connected

What trade offs do we make in terms of equality of freedom equality of opportunity or outcome

How public policy addresses unfairness

Model to assess institutions

Considering allocation of grains and Angela’s free time with 2 self interested agents

What do Angela’s indifference curves look like

Convex to the origin

MRS declines from left to right

Assume curves are vertically parallel which reflects assumption that MRS only changes with free time

What does Bruno’s indifference curves look like?

Horizontal lines - only cares about grain

Angela’s production function

Concave shape indicates diminishing marginal productivity as Angela’s day gets longer

How to work out feasible frontier from production function

Mirror image where axis now represents free time

Marginal rate of transformation

Slope of efficient frontier

Tenure

How property is held

Communal tenure

Common access for members of the community - outsiders may still be excluded

Open access

Nobody is excluded

State tenure

Rights are held communally but assigned to a state body

What would Angela choose to produce?

Where the feasible frontier meets the highest indifference curve. MRS = MRT