This is a study to explain why there is big difference between rich countries and poor ones. In this paper, author adapt new or endogenous growth models feature externalities that increase with investment or with stocks of human or tangible capital and can readily explain why countries with high per capita incomes grow as fast or faster as low-income countries.
As an explanation for the fastest-growing countries are poor countries, it says poor countries on average have opportunities to grow faster than riches, but poor economic policy or institution prevent it.
Q What is endogenous model?
Friday 19 December 2008
Thursday 18 December 2008
Douglass C.North(1991)”Institutions”
Institutions include formal(laws, constitutions) and informal(conventions, traditions). This paper shows relationship between economic development and institutional development, because in economic history, institutions are given.
In this paper, institutions made to make monopolistic situation first, because there is no authority and someone who has more skill and information get more power and for them, monopoly is the best way to keep profit. However, this monopolistic situation makes a gap between players. This emerge competition, evolution, incremental development. Less profitable player tries to get more profit to create better institution, and monopolistic situation will become weak because it is weakness of whole country in terms of national competition.
However, “good” institution depends on environment. If one institution is good in U.S., it does not mean it will work in Latin America.
In this paper, institutions made to make monopolistic situation first, because there is no authority and someone who has more skill and information get more power and for them, monopoly is the best way to keep profit. However, this monopolistic situation makes a gap between players. This emerge competition, evolution, incremental development. Less profitable player tries to get more profit to create better institution, and monopolistic situation will become weak because it is weakness of whole country in terms of national competition.
However, “good” institution depends on environment. If one institution is good in U.S., it does not mean it will work in Latin America.
Ross Levine(2005)"Law, Endowments and Property Rights”
This is a research to inspect historically-formed questions; Property rights are affected by law and endowments? Many researchers show property rights are crucial for personal welfare and economic development, but they did not show the reason for differences in property rights among countries.
In this paper, author test the relation between law and property rights, and endowments and property rights. Law means common law(British) and civil law(French). And common law has better property rights than civil one because latter was made to minimize jurisdiction. Endowments mean inequality of wealth. If there is inequality of wealth between people, elites made law to protect and exploit others. And if wealth are equal, law is made for equality.
In conclusion, historical hypothesis is proved.
In this paper, author test the relation between law and property rights, and endowments and property rights. Law means common law(British) and civil law(French). And common law has better property rights than civil one because latter was made to minimize jurisdiction. Endowments mean inequality of wealth. If there is inequality of wealth between people, elites made law to protect and exploit others. And if wealth are equal, law is made for equality.
In conclusion, historical hypothesis is proved.
David S. Lamdes(2006)”Why Europe and the West? Why not China”
This is a study to explain the reason why China lose westerners nevertheless it exceeded western before 19 century.
According to the paper, there were two chances to develop, but China failed. The reason is social system and value.
Chance 1: continuing technology
Lacked a free market and institutionalized property rights.
Lager value of society weights custom and consensus.
-in Europe, Judaeo-Christian respect for labor as religious value
-free market is self-development system because an enterprise is free and innovation worked and paid, that rulers and vested interests were narrowly constrained in what they could do to prevent or discourage innovation.
Chances 2:learn from western
One consequence was a prudent, almost instinctive, resistance to change
Another consequence was a plague of lies and misinformation: officials wrote and told their superiors what they wanted to hear: or what the subordinate thought the superior would want to hear.
According to the paper, there were two chances to develop, but China failed. The reason is social system and value.
Chance 1: continuing technology
Lacked a free market and institutionalized property rights.
Lager value of society weights custom and consensus.
-in Europe, Judaeo-Christian respect for labor as religious value
-free market is self-development system because an enterprise is free and innovation worked and paid, that rulers and vested interests were narrowly constrained in what they could do to prevent or discourage innovation.
Chances 2:learn from western
One consequence was a prudent, almost instinctive, resistance to change
Another consequence was a plague of lies and misinformation: officials wrote and told their superiors what they wanted to hear: or what the subordinate thought the superior would want to hear.
Tuesday 16 December 2008
Lecture 13: Coordination Problems
Today’s lecture was the last lecture. It was about coordination problems; matching players to achieve efficient outcomes. This is an area of incentive problems.
Multiple Payoff-equivalent Equilibria:
This is a kind of meet friend game(if they meet with each other in the same place, they will be happy otherwise, not. And the place is indifferent)
To attain coordination, we can use sequentially decision, communication, third-party recommendation, and convention.
Multiple Payoff-ranked Equilibria:
This is a kind of previous case, but one place is better than the other. In this case, pure strategy equilibria is same.
Payoff vs Risk(Stag hunt)
Consider previous game + Chicken(two same strategies’ pares are indifferent, and the others are only one player gets outcome).
There are two equilibriums. One is Pareto-dominant, the other is risk-dominant(because if one does not want to get Pareto-dominant equilibrium, one can make sure to get at least something slightly lower than Pareto-dominant equilibrium) there is two ways to attain coordination.
self-signaling:
action is an action chosen partly to secure good news about one’s traits or abilities, even when the action has no causal impact on these traits and abilities.
Self-commitment:
To show willingness to do something.
In this game, it is difficult to know what was perceived by other people.
Coordination on efficient outcomes is reached often with two-side communication, less often with one-sided communication, and very rarely without communication.
Without communication, if third party(public) suggestion is given, they can accept the suggestion if it is efficient equilibria, but otherwise, not.
Weak-Link Games:
Each player’s payoff is determined by the own choice and minimum of opponents’ choice.
For any number of players, there are 7 pure strategy equilibria(each player chooses same number in games)
Evidences:
By experiments, if number of player is increasing, the outcome become worse(because people think there are someone to choose 1).
Moreover, Increasing specialization(team size) can be dangerous. Raise team size only gradually, after having coordinated on a good outcome.
Organizational Languages:
Player: manager and workers
Rule: in 20 round, a manager teaches a worker a order of 8 of 16 pictures. And after that, half of workers join other managers’ pair and taught same thing as other workers do.
Result:
Over first 20 rounds, an efficient and relationship specific language develops (experienced workers are better than inexperienced)
It shows mergers lead to short-run loss of performance(of more than 25%), because of language mismatch.
We can say subjects overestimate value of mergers; they guessed that completion times would not decline so much.
Subjects attributed part of the decline to inefficient newcomers: workers rate new managers worse than old; managers rate new workers worse. Despite understanding that their task is harder (in this experiment, the work itself is same)
Multiple Efficient Equilibria;
“Battle of sexes”
(payoff matrix is like a chicken game, but two equilibriums are indifferent; one is good for one, another is good for another person), but if each of them choose same strategy, they get nothing.
In this game, one-side communication usually reach coordination.
Two-side communication, coordination achieved in 55% of cases if one round of communication; three round is 63%.
Without communication, coordination in 48% of cases.
Authority:
Formal authority: label(King, Boss)
Real authority is an equilibrium outcome
The label(boss, king) indicates that subordinates are supposed to play according to the authority’s directives, and to ignore competing massages from others(If players are given the role of king or servant, they can reach agreement easier than no role)
Remarks:
Labels only affect play if some convention(like the above) is attached.
A player has real authority if all others play the suggested equilibrium.
Formal authority is worthless absent real authority.
Authority only admits choice of equilibrium(do not affect strategy or payoff itself)
Absolute Authority:
The right a player can induce her preferred equilibrium.
If a player has absolute authority, efficient equilibrium is often not achieved because the player does not have credibility.
Divided Authority:
Magna Carta, and the Glorious Revolution gives king better position. Division of power can make everyone stronger by strengthening their commitment abilities.
Multiple Payoff-equivalent Equilibria:
This is a kind of meet friend game(if they meet with each other in the same place, they will be happy otherwise, not. And the place is indifferent)
To attain coordination, we can use sequentially decision, communication, third-party recommendation, and convention.
Multiple Payoff-ranked Equilibria:
This is a kind of previous case, but one place is better than the other. In this case, pure strategy equilibria is same.
Payoff vs Risk(Stag hunt)
Consider previous game + Chicken(two same strategies’ pares are indifferent, and the others are only one player gets outcome).
There are two equilibriums. One is Pareto-dominant, the other is risk-dominant(because if one does not want to get Pareto-dominant equilibrium, one can make sure to get at least something slightly lower than Pareto-dominant equilibrium) there is two ways to attain coordination.
self-signaling:
action is an action chosen partly to secure good news about one’s traits or abilities, even when the action has no causal impact on these traits and abilities.
Self-commitment:
To show willingness to do something.
In this game, it is difficult to know what was perceived by other people.
Coordination on efficient outcomes is reached often with two-side communication, less often with one-sided communication, and very rarely without communication.
Without communication, if third party(public) suggestion is given, they can accept the suggestion if it is efficient equilibria, but otherwise, not.
Weak-Link Games:
Each player’s payoff is determined by the own choice and minimum of opponents’ choice.
For any number of players, there are 7 pure strategy equilibria(each player chooses same number in games)
Evidences:
By experiments, if number of player is increasing, the outcome become worse(because people think there are someone to choose 1).
Moreover, Increasing specialization(team size) can be dangerous. Raise team size only gradually, after having coordinated on a good outcome.
Organizational Languages:
Player: manager and workers
Rule: in 20 round, a manager teaches a worker a order of 8 of 16 pictures. And after that, half of workers join other managers’ pair and taught same thing as other workers do.
Result:
Over first 20 rounds, an efficient and relationship specific language develops (experienced workers are better than inexperienced)
It shows mergers lead to short-run loss of performance(of more than 25%), because of language mismatch.
We can say subjects overestimate value of mergers; they guessed that completion times would not decline so much.
Subjects attributed part of the decline to inefficient newcomers: workers rate new managers worse than old; managers rate new workers worse. Despite understanding that their task is harder (in this experiment, the work itself is same)
Multiple Efficient Equilibria;
“Battle of sexes”
(payoff matrix is like a chicken game, but two equilibriums are indifferent; one is good for one, another is good for another person), but if each of them choose same strategy, they get nothing.
In this game, one-side communication usually reach coordination.
Two-side communication, coordination achieved in 55% of cases if one round of communication; three round is 63%.
Without communication, coordination in 48% of cases.
Authority:
Formal authority: label(King, Boss)
Real authority is an equilibrium outcome
The label(boss, king) indicates that subordinates are supposed to play according to the authority’s directives, and to ignore competing massages from others(If players are given the role of king or servant, they can reach agreement easier than no role)
Remarks:
Labels only affect play if some convention(like the above) is attached.
A player has real authority if all others play the suggested equilibrium.
Formal authority is worthless absent real authority.
Authority only admits choice of equilibrium(do not affect strategy or payoff itself)
Absolute Authority:
The right a player can induce her preferred equilibrium.
If a player has absolute authority, efficient equilibrium is often not achieved because the player does not have credibility.
Divided Authority:
Magna Carta, and the Glorious Revolution gives king better position. Division of power can make everyone stronger by strengthening their commitment abilities.
Lecture12: Bounded Rationality
Today's subject was another type of economic psychological theory; bounded rationality. For bounded recall, the teacher told us relation of memory in Prisoners’ Dilemma, Tid-for-tat strategy, indirect reciprocity. As for Self-serving bias, he mentioned about some experiments and field study. Finally, he treated Time Inconsistency using three period models. What was interesting for me was he mentioned about similarity between economics and biology in the argument of “organization”. That was exactly what I thought!
Bounded recall:
This is a supplement of memory for game because memory is important for institutional solution to incentive problems. In fact, in the repeated two-player prisoners’ dilemma, needed memory is only one period.
Example: Sequential Prisoners’ Dilemma
Player: 1 and 2
Rules: choose C or D, repeatedly
Payoff: U(C,C) U(C,D) U(D,C) U(D,D)
Outcome: U(C,C)=a U(C,D)=b U(D,C)=c U(D,D)=d
C=cooperates, D=defets
Strategies:
Tit-for-tat(TFT): do always others do
TFT is stable when δ is sufficiently large, but it is vulnerable if there is some mistakes to choose. A better strategy is forgiving TFT. Even better is WSLS(Win-Stay Lose-Shift). This means first one sets a target of his payoff, and if the payoff is higher than the target, he stays. Otherwise, he change. If constant positive probability another round isδ>a/b, it is ESS(Evolutionary Stable
Strategy; the strategy to reach maximization without other hypothesis, and Nash equilibrium that can explain social evolution.)
Indirect Reciprocity:
When players switch partners often, with reputation across interactions, cooperation is sustainable. To consider (i) cooperate unless the opponent is known defector, (ii) always defect, necessary condition for cooperation in equilibrium is q>a/b). but of course, one-period memory of actions does not quite suffice because we do not see types, only behaviors.
The justification of government:
According to David Hume, the reasons for needs of government are:
(i) People do not have impartial view
(ii) People cannot plan for long time
(iii) There are public goods
Self-serving Bias:
Agents may have self-serving interpretations of fairness.
Tort Case Experiment:
Self-biased leads disagreement, and if they know each other the rate of impasses become smaller.
A field study:
Public school teacher’s negotiation.
Both employers and teachers use wages in comparison districts as argument, but the comparison is biased. Incidence of strikes is related difference in comparison group. A solution is to add some teacher to board, or to adapt job rotation.
Time inconsistency:
Even a single person may have problems making credible commitments to herself:
The reason for prohibitions is for the merit of a person who wants to do such things.
Time inconsistent model:
U=u(c0)+βΣδu(ct) (if δ<1, the agent is time inconsistent. And δ=1, it is the same as conventional model: U=Σδu(ct))
If taken three period model, Utility is
U= In c1 + βδInc2 +βδ2Inc3
Total income is Y. Suppose interest rate is zero, then
C1+c2+c3-Y=0
Case(i); Full Commitment
Optimization through three period
Case(ii): No Commitment
Consider c3*=Y-c1-c2, c2+c3=Y-c1, and solve c1* to maximize period 1.
If there is no commitment, consumption is higher in Period 2 and lower in Period 3. and if the agents cannot commit, he is worse off. Suppose if politician propose a compulsory pension scheme forcing people to consume less in period 2 and more in period 3. Politician will be elected because they want someone to force them save money for period 3.
Another implications:
1. Why people save illiquid assets:
People want something force them to save money
2. Why they borrow and save simultaneously
People want something force them to save money
3. Why consumption drops heavily at retirement
People views spot time utility optimization
4. Why people agree to ban drugs and prostitution
People thinks it is good for themselves even if they want to do so.
5. Xenical and Antabus
People want to diet or be healthy even if they do not try
Dual Process Mind?
Ambiguity aversion and loss aversion.
There are two ways to decide: instinctive and cognitive
Analyzing dual-self model: long-run/short-run self: period 1 is much and 2 and 3 is less.
Bounded recall:
This is a supplement of memory for game because memory is important for institutional solution to incentive problems. In fact, in the repeated two-player prisoners’ dilemma, needed memory is only one period.
Example: Sequential Prisoners’ Dilemma
Player: 1 and 2
Rules: choose C or D, repeatedly
Payoff: U(C,C) U(C,D) U(D,C) U(D,D)
Outcome: U(C,C)=a U(C,D)=b U(D,C)=c U(D,D)=d
C=cooperates, D=defets
Strategies:
Tit-for-tat(TFT): do always others do
TFT is stable when δ is sufficiently large, but it is vulnerable if there is some mistakes to choose. A better strategy is forgiving TFT. Even better is WSLS(Win-Stay Lose-Shift). This means first one sets a target of his payoff, and if the payoff is higher than the target, he stays. Otherwise, he change. If constant positive probability another round isδ>a/b, it is ESS(Evolutionary Stable
Strategy; the strategy to reach maximization without other hypothesis, and Nash equilibrium that can explain social evolution.)
Indirect Reciprocity:
When players switch partners often, with reputation across interactions, cooperation is sustainable. To consider (i) cooperate unless the opponent is known defector, (ii) always defect, necessary condition for cooperation in equilibrium is q>a/b). but of course, one-period memory of actions does not quite suffice because we do not see types, only behaviors.
The justification of government:
According to David Hume, the reasons for needs of government are:
(i) People do not have impartial view
(ii) People cannot plan for long time
(iii) There are public goods
Self-serving Bias:
Agents may have self-serving interpretations of fairness.
Tort Case Experiment:
Self-biased leads disagreement, and if they know each other the rate of impasses become smaller.
A field study:
Public school teacher’s negotiation.
Both employers and teachers use wages in comparison districts as argument, but the comparison is biased. Incidence of strikes is related difference in comparison group. A solution is to add some teacher to board, or to adapt job rotation.
Time inconsistency:
Even a single person may have problems making credible commitments to herself:
The reason for prohibitions is for the merit of a person who wants to do such things.
Time inconsistent model:
U=u(c0)+βΣδu(ct) (if δ<1, the agent is time inconsistent. And δ=1, it is the same as conventional model: U=Σδu(ct))
If taken three period model, Utility is
U= In c1 + βδInc2 +βδ2Inc3
Total income is Y. Suppose interest rate is zero, then
C1+c2+c3-Y=0
Case(i); Full Commitment
Optimization through three period
Case(ii): No Commitment
Consider c3*=Y-c1-c2, c2+c3=Y-c1, and solve c1* to maximize period 1.
If there is no commitment, consumption is higher in Period 2 and lower in Period 3. and if the agents cannot commit, he is worse off. Suppose if politician propose a compulsory pension scheme forcing people to consume less in period 2 and more in period 3. Politician will be elected because they want someone to force them save money for period 3.
Another implications:
1. Why people save illiquid assets:
People want something force them to save money
2. Why they borrow and save simultaneously
People want something force them to save money
3. Why consumption drops heavily at retirement
People views spot time utility optimization
4. Why people agree to ban drugs and prostitution
People thinks it is good for themselves even if they want to do so.
5. Xenical and Antabus
People want to diet or be healthy even if they do not try
Dual Process Mind?
Ambiguity aversion and loss aversion.
There are two ways to decide: instinctive and cognitive
Analyzing dual-self model: long-run/short-run self: period 1 is much and 2 and 3 is less.
Sunday 14 December 2008
Luigi Guiso, Paola Sapienza and Luigi Zingales(2006)”Does Culture Affect Economic Outcomes?”
This is a application economical analysis to culture. In recent years, some research about relation between cultures and economic outcomes emerged through better techniques of cultural analysis. This paper summarizes these approach and achievements.
In this paper, authors define culture as “those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation”, and affect society through prior beliefs and values or preferences.
First, it shows direct impact of culture on expectation and preferences. Second it describes the fact that beliefs and preferences have an impact on economic outcomes. And last, it demonstrates interaction between culture and economics. But it also takes the thought that culture changes slowly and therefore culture is given for people in the culture.
In conclusion, it shows culture affects economical outcomes, and even a culture which was made when it was useful becomes a constraint for another situation, it remains.
Questions:
What is basic logic for effectiveness of culture to beliefs and preferences?
In this paper, authors define culture as “those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation”, and affect society through prior beliefs and values or preferences.
First, it shows direct impact of culture on expectation and preferences. Second it describes the fact that beliefs and preferences have an impact on economic outcomes. And last, it demonstrates interaction between culture and economics. But it also takes the thought that culture changes slowly and therefore culture is given for people in the culture.
In conclusion, it shows culture affects economical outcomes, and even a culture which was made when it was useful becomes a constraint for another situation, it remains.
Questions:
What is basic logic for effectiveness of culture to beliefs and preferences?
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