PA30 Final Review

3 types of social dilemmas

1. externalities

2. coordination problems

3. commitment problems

what are two types of problems related to incomplete information?

1. Agency problems

2. strategic adjustment

consequentialism

assessing the rightness of a policy based on its consequences; if the policy leads to a good outcome, then it is the right thing to do.

Utilitarianism

3 components of classical utilitarianism. Explain each.

1. Hedonism: an individual has greater welfare if they have more pleasure/less pain

2. Welfarism: a state of the world is better if it has more aggregate welfare

3. Consequentialism: an action is right if it leads to a better state of the world

Benefits of utilitarianism

• easier to compare trade-offs

• transforms philosophical inquiries into empirical questions

• treats everyone in a population equally and supports equity enhancing policies that maximize aggregate welfare

Challenges of utilitarianism

• deciding whose utility matters most

• aggregate utility is not always the right outcome

• not all preferences are legitimate

Deontology

assessing the rightness of a policy based on its conformity to a moral norm or duty, not based on its consequences, whether an act is right has priority over whether it has a good outcome

Kant’s categorical imperatives

1. Only do what is “right” for everyone else to do

2. We should never treat another persons humanity as a means to an end, but as the end itself

benefits of Kantian ethics

• we cannot make selfish decisions

• it accommodates special human relationships

challenges of Kantian ethics

• suggests not to lie, even when necessary

• its hard to weigh trade-offs

Libertarianism

a deontological framework that evaluates policy based on its respect for self ownership, emphasizes consent

casual effects

change in outcomes attributed solely to a policy

3 modes of statistical inference

1. descriptive inference: summarizing relationships

2. predictive forecasting

3. causal inference

what is the difference between a descriptive and causal claim?

what happened vs what would have happened

what is the fundamental problem of causal inference

we cannot observe the same unit, in the same moment, with or without the treatment and control

What is a counterfactual?

What the outcome would have looked like in the absence of the intervention

selection bias

errors due to systematically different relevant characteristics between those who are in the study and those who are not, data does not reflect target population

what is the difference between correlation and causation?

correlation indicated a pattern between two variables. Causation indicated one variable directly causes the other to change.

What are the components of a game (game theory)?

• actors'

• payoffs'

• information

• strategies

• outcome

strategic interaction

situations in which others choices directly affect your well being

interdependence

The costs and benefits associated with a particular choice depends on what others do

non strategic interaction

situations where ones pay offs do not depend on what others do

What is the difference between a matrix and decision game theory game

In decision tree, one player can see the other players strategy before making their decision. This is not possible in a matrix game.

Nash Equilibrium:

a situation in which a player will continue with their chosen strategy after taking into consideration their opponents strategy

What is the value of models?

they simplify data to focus on essential features of a problem

policy 1 Pareto dominates policy 2 if…

• nobody strictly prefers policy 2 to 1

• at least one person strictly prefers 1 to 2

Pareto dominant

if shifting from one policy to another makes at least one person better off and nobody worse off

If a policy pareto dominates another policy, it is a Pareto improvement

when is a policy Pareto efficient?

When is a policy Pareto inefficient?

social dilemma

situation in which everyone behaves in a self-interested manner because they anticipate everyone to do so, and that leads to a Pareto inefficient outcome.

If you are in a game where the Nash equilibrium is Pareto inefficient, that is a ___

social dilemma

problem with social dilemmas

requires people to act in a manner that’s not for their self interest (not likely)

benefit of social dilemma

pareto improvements are possible

externalities

a spillover effect on the welfare of others

positive externality

the spillover effect enhances the wellbeing of others

public goods

non-excludable and non rivalrous goods

policy solutions to encourage contributions to public goods

• persuasion

• reduce individual cost

• boost individual benefit

  • subsidize contributions

  • punish inaction

negative externality

negative spillover effect

policy solutions for affecting public goods

• impose taxes

• regulate/punish violators

__ are oversupplied. Why?

negative externalities because actor does not internalize all of the costs associated with this behavior.

__ are undersupplied. Why?

positive externalities because people are less likely to engage in behavior that is in the best interest g

Commons

a set of common pool resources which yield infinite flows of benefits, where it is difficult and costly to exclude potential users.

2 features of commons

rivalrous and non excludable

What conditions invite tragedy?

settings where there is a large group, nobody communicates, and where no rights to the resources exist.

why do the conditions of tragedy make the problem worse?

• hard to police behavior

• hard to define a set of legitimate users

• hard to establish rules

What policy solutions exist for tragedy of the commons?

• privatization

• taxation

• subsidies

• regulation

• self-organization

self organization

The resource users establish basic rules- which actions are permitted and by whom

tragedy of the commons

individual overuse of a shared resource that causes collective detriment

Agglomeration

clustering of economic activity (industries) in a particular location

Why does agglomeration happen?

one firm’s payoff can be higher if they locate in a particular city if another firm is also in that city and vice versa

strategic complementaries

the benefit of taking an action is larger when other actors also take that action.

3 types of coordination problems. Describe them.

1. pure coordination: equally advantageous equilibria

2. distributional: players favor different equilibria

3. coordination traps: one equilibrium Pareto dominates another

only __ can generate a social dilemma

coordination traps

coordination trap

when there are multiple equilibria but one Pareto dominates the other

“trap” part of coordination trap

neither actor want to deviate from the inefficient Nash equilibrium, but would both be better off with the other equilibrium

possible policy solutions for coordination problems

communication, leadership, insurance

why are short term interventions sufficient for coordination problems?

it is self reinforcing because neither player wants to deviate from the new, better equilibrium

commitment problems

when one or both parties have the incentive to renege on an agreement

hold up problems

a lack of commitment leads to inefficiently low levels of investment

fundamental problem of exchange

one party may have the opportunity to cheat the other

what was the silk road and how did solve the fundamental problem of exchange?

escrow, rating systems, banning traders

State

entity with a monopoly of the legitimate use of physical force within a given territory.

How do states solve commitment problems?

• punishes predatory behavior

• fear of prosecution leads to optimal behavior

• all individuals benefit from how state constrains choice

Wars are an example of what social dilemma and why?

commitment problems because was is a failure of bargaining, an inefficient outcome that a parties would avoid in the absence of bargaining imperfections.

political commitment problems

Political elites may oppose policies that generate Pareto improvements, because they fear that those policies may erode their future power.

How do commitment problems get in the way of autocrats stepping down?

the next regime cannot assure the autocrat of immunity. fear of prosecution abroad or at home

Anarchy

a state or society with government or formal authority

Asymmetric Information

In games of incomplete information, an actor (or actors) may not their counterparts payoffs or choices.

Principal

person hiring

Agent

person being hired

principal agent problems

When a principal offers a contract to an agent and there are conflicting interests or asymmetric information

Hidden type

agent’s traits

Hidden actions

agents choices

adverse selection

hidden type problem, how can principal recruit an agent who works to advance principals interests?

moral hazard

hidden action problem, how can principal control agents behavior after being hired

how to address adverse selection

• collect information on type

• amplify benefits that appeal to good types

• ask agents for warranties and guarantees

How can we address moral hazard?

• monitoring agents

• modifying incentives of agent to align interests

• stipulate a code of ethics, in which agents commit t serving their principals.

The Alignment problem

how do you ensure AI systems pursue the user’s goals, protect human values, misalignment.

Two goals as policymakers:

1. use policy to help solve principal agent problems that arise in other sectors

2. try to eliminate agency problems that leads public officials to act to voter’s interest.

Why aren’t agency problems social dilemmas

there may not be solutions that promise pareto improvements

How do we avoid adverse selection when voting for elected officials?

• vetting parties- debates, primaries, opposition research

• media- fact checking, investigative journalism

• ethics investigations

Why DO institutions and the desire to win re-election keep polls in line?

• leaders are limited by history and must choose from a historically determined set of choices.

• leaders are limited by institutions

• leaders are given too much credit because we have a psychological need to attribute change to a higher power.

Why WONT institutions and the desire to win re-election keep polls in line?

• institutions are limited and provide only limited restraints

• identity shapes policy priorities

Attractiveness Ratio:

A= rents + wages/public service motivation + wages

wages

formal compensation

rents

informal benefits from holding office

Public service motivations

ethic of serving others

What happens when the attractiveness ratio A appears large to many people?

more bad types are more likely to run for office

How might we reduce the attractiveness ratio?

• checks and balances that limit rent (informal benefits)

  • free press/ investigative journalism

  • enforced ethics rules

  • opposition research, electoral competition

• Instilling a public service ethos

  • national service requirements

  • conferring status to public officials

Success Ratio

S = probability of electing bad/ probability of electing good

why would success ratio S not likely to ever be zero?

in some cases, voters prefer a low quality candidate that shares their own policy preferences to a high quality candidate from the other group

How might we reduce the success ratio?

• free press

• electoral competition

• primary elections

• limited polarization

Opportunity Cost Ratio

O=outside option of bad/ outside option of good

how to lower opportunity cost ratio

• not permitting lobbying and campaign contributions

• suppressing a private sector

Accountability Ratio

R = probability of re-electing bad/ probability of re-electing good

What is the accountability ratio related to?

moral hazard

how to limit moral hazard in relation to elected officials

• monitoring

  • media

  • ethics inquiries

  • oversight from other branches of government

• Performance incentives

  • re-election

  • impeachment

  • campaign contributions

  • civil disobedience

• Ethics

  • oath of office

  • pledges to never do a certain act

What is public corruption?

abuse of power for private benefit

What is correlated with corruption?

• low income/ education

• less open to trade

• greater regulation to entry

• less press freedom

• lack of democracy