8+9 Flashcards
(17 cards)
2 main categories of behaviour that violate monetary payoff maximising/optimisation
- pareto damaging behaviour = sascrifice money to punish those who mistreat them
- helpful sacrifise = share money with parties who have no say in allocations
Example of mechanism of systematic error
Projection bias and life-cycle
1. consumption is habit-forming (we adapt, and the more you consume today the less valuable consumption becomes in the future)
2. but projection bias make us underappreciate this
3. plan to consume too much early in life, and too little late in life
4. continued projection bias worsens this effect
Ultimatum game
P1 propose, p2 accpet/reject
result:
* modal and median 40-50%, rarely rejected
* offer below 20% rejected around half the time –> punish unfainess, not money maximising
NE: best response given opponent’s strategy
e.g. P2 reject x<50, so p1 BR is to offer 50
but problematic as P2 should accept any x>0 –> non-credible threat. P1 should not believe p2’s threat
SPNE: p1 offer smallet & p2 accept
BUT SPNE not found in exp. result
–> imply social pref.
Violates SPNE
Dictator game
- only player 1 offer, second stage eliminated
NE: p1 should offer least possible (if money max.)
data: offer 10-30% of the total amount
Violates NE
4 alternative outcome-based social pref.
- altruistic: utility increasing function of other’s outcome
- competitive: utility decreasing of other’s outcome
- Rawlsian: utility dependent on the minimum outcome of all concerned
- Utilitation: dependent on total private utility of all concerned (sum of everyone)
Difference/inequity aversion
discomfort with differences, even if justified
Charness and Rabin, 2002
Required Reading
29 games to test the role of different social motivations
[equation of utility]
[know the values for altruistic, competitive, difference aversion, reciprocity]
* 69% chose (750, 400) insetad of (400, 400) –> shows utilitarian (max social welfare)
* 48% chose (750, 375) insetad of (400, 400) –> self-interest
* 100% chose (800,200) instead of (0,0)
–> inequality aversion weakens when costly
anothergame choice setting showed evidence for positive and negative reciprocity.
❌ Few people are willing to sacrifice money to reduce inequality by hurting others’ payoffs.
✅ Around half of subjects are willing to increase inequality if the action is efficient and low-cost.
🙅 Positive reciprocity (rewarding kindness) is not strongly observed.
Kube et al. 2019
Required Reading
- one-time job opporunity (not for ongoing interaction as one-time employment)
- Treatments:
1. cash (20% increase in wage)
2. wbottle
3. choose cash/bottle
4. cash folded in origami
Result: - bottle & choice –> large increase in productivity by 20%
- origami cash –> 30% increase
–> indicates kindness /effort/care
–> evidence for reciprocity
Levitt et al. (2007)
Required Reading
- subject selection (volunteers /uni students) –> not representative
- context/framing –> does not match real life
- unparalleled scrutiny –> being watched / observed, thus alter behaviour
Neoclassical assumptions
- Individuals have consistent and rational preferences.
- make choices over entire lifetime plans, not just single moments
- preferences do not change over time.
- no mistakes
Thaler, Richard and Cass Sunstein (2003)
Required Reading
Libertarian: policies that maintain or increase freedom of choice
Paternalism: influencing choices “in a way that will make them beter off”
The authors claim anti-paternalistic stances are based on:
1. flase assumption that people laways make choice in their best interest
2.
Government design
- maximise utility
subject to - revennue requirement (tax x choices)
- choices = max (utility of choice given state and nudges, subject to (pre-tax + tax) x choice = wealth)
Neoclassical assumes:
1. planner does not have policy nudges
2. decision utility is a smooth, increasing and concave function of consumption choices
3. experienced utility equals decision utility
Relaxing assumptions yields new policy tools (nudges), better predictions, new welfare implications (enhance normative understanding of the optimal design of policies)
Di Tella, Rafael, Robert MacCulloch and Andrew Oswald (2001)
Required readings
Euro-Barometer Survey Series: Approximately 265,000 individuals across 12 European countries (1975–1991).
U.S. General Social Survey: 26,668 individuals (1972–1994).
Key findings: Both higher unemployment and higher inflation are associated with lower reported life satisfaction.
The negative impact of unemployment on happiness is approximately twice that of inflation.
These effects persist even after controlling for individual factors and country-specific variables.
Layard (2006)
Required Reading
1. Corrective Tax for Social Comparisons: happiness is reduced when others earn more, creating a positional externality that taxes can help correct while potentially improving overall efficiency.
2. Progressive Consumption Tax
Policy: consumption often fuels status competition, taxing it can reduce positional distortions and limit socially wasteful economic competition.
3. Corrective Tax Due to Adaptation and Internalities: Individuals may overestimate the happiness gained from higher income, creating internalities that justify government intervention to prevent overwork and unhappiness.
4. Stabilisation Policy
Policy: protect people from large income fluctuations (loss aversion)
5. Limit Advertising and Performance Pay: promote extrinsic values and distorted preferences, which can undermine long-term well-being and cultural sources of happiness.
Difference between actual and informed preferences
Actual: indicated by choice behaviour and verbal statement
Informed: preferneces they would have if they had all the relevant information
Mistaken preference: actual ≠ informed
welfare economics and ethics should be defined by informed, not actual
Policy implaction
- loss aversion –> stablisation policy
- adaptation –> corrective tax –> prevent overwoking / overconsuming
- happiness is culturally determined (recognise cost of advertising, performance related pay, values matter)
Inflation & Unemployment trade off
higher unemployment & higher inflation –> lower reported wb
* unemployment reduces wb more than inflation (by 5-6 times more)
* to compensate 1%pt increase in employment, inflation need to fall 4-5% pt to keep wb same
–> policy should weigh cost of unm. more heavily when balancing inflation & employment goals
