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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
Note 
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