Pub Pol 303 Midterm

Free ride

Benefiting from the contributions of others to some cooperative project without contributing oneself.

Simultaneous game

A game in which players choose strategies simultaneously, for example the prisoners' dilemma.

Prisoner's Dilemma

A game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy.

Reservation option

A person's next best alternative among all options in a particular transaction.

Dominant strategy

Action that yields the highest payoff for a player, no matter what the other players do.

Feasible Set

All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces.

Pareto dominant

Allocation A Pareto-dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off.

Strategy

An action (or a course of action) that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person's actions, but also on the actions of others.

Pareto efficient

An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off.

Dominant strategy equilibrium

An outcome of a game in which every player plays his or her dominant strategy.

Social norm

An understanding that is common to most members of a society about what people should do in a given situation when their actions affect others.

Best response

In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select.

Institution

The laws and social customs governing the way people interact in society

Piece rate pay

worker paid a fixed amount for each product made

Transivity

"I'm consistent in my preferences"; If I prefer A to B and B to C, then I prefer A to C. Indifference curves do not cross

Monotonicity

"More is better" ; I prefer more of B to less of B, holding A constant. Higher indifference curves correspond to higher utility levels

Continuity

"No sudden jumps" ; Small changes in A or B do not cause drastic changes in utility. Indifference curves are usually smooth.

Separation of Ownership and Control

The attribute of some firms by which managers are a separate group from the owners.

Pareto improvement

A change that at least benefits one person without making anyone else worse off.

Incomplete Contract

A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others).

Indifference curve

A curve of the points which indicate the combinations of goods that provide a given level of utility to the individual.

Reservation Indifference curve

A curve that indicates allocations (combinations) that are as highly valued as one's reservation option.

Preferences

A description of the benefit or cost we associate with each possible outcome.

Allocation

A description of who does what, the consequences of their actions, and who gets what as a result. AKA an outcome

Inequality aversion ; fairness

A dislike of outcomes in which some individuals receive more than others.

Sequential game

A game in which all players do not choose their strategies at the same time, and players that choose later can see the strategies already chosen by the other players, for example the ultimatum game.

Game

A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs.

Labour Discipline Model

A model that explains how employers set wages so that employees receive an economic rent (called employment rent), which provides workers an incentive to work hard in order to avoid job termination.

Utility

A numerical indicator of the value that one places on an outcome, such that higher valued outcomes will be chosen over lower valued ones when both are feasible.

Economic rent

A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option).

Reciprocity

A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind.

Nash Equilibrium

A set of strategies, one for each player in the game, such that each player's strategy is a best response to the strategies chosen by everyone else.

Social dilemma

A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals.

Diminishing Returns

A situation in which the use of an additional unit of a factor of production results in a smaller increase in output than the previous increase.

Tragedy of the Commons

A social dilemma in which self-interested individuals acting independently deplete a common resource lowering the payoffs of all.

Strategic Interaction

A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that the actions of others affect them).

Firm

A) employs people B) Purchases inputs to produce market goods and services C) Run to maximize profits

Budget Constraint

An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one's budgetary resources.

Procedural concepts of fairness

An evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself, (for example, how unequal it is).

Social interaction

Situations in which the actions taken by each person affect other people's outcomes as well as their own.

Firm-specific Asset

Something that a person owns or can do that has more value in the individual's current firm than in their next best alternative. Ex: Network of colleagues, skills necessary for the job

Efficiency wage

The payment an employer makes that is higher than an employee's reservation wage, so as to motivate the employee to provide more effort on the job than he or she would otherwise choose to make.

Residual Claimant

The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes). Usually the owner

Mutual gain

United in common interest in firm's sucess

Involuntary Unemployment

being out of work, but preferring to have a job at the wages and working conditions that otherwise identical employed workers have.

Expected payoffs

the payoff you get if the offer is accepted multiplied by the probability that it will be accepted

Public good

A good for which use by one person does not reduce its availability to others. Non-rival and non-excludable.

scarcity

A good that is valued, and for which there is an opportunity cost of acquiring more.

Isocost curve

A line that represents all combinations that cost a given total amount. Represent indifference curve for owners.

Mutual conflict

Divided over how to distribute the firm's profits

Minimum acceptable offer

In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. Generally applied in bargaining situations to mean the least favourable offer that would be accepted.

Disposable income

Income available after paying taxes and receiving transfers from the government

Asymmetric information

Information that is relevant to the parties in an economic interaction, but is known by some but not by others.

Substantive concepts of fairness

Judgements based on the characteristics of the allocation itself, not how it was determined.Allocations are unequal

Social preferences

Preferences that place a value on what happens to other people, and on acting morally, even if it results in lower payoffs for the individual.

Power

The ability to do (and get) the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions.

Feasible Frontier

The curve made of points that defines the maximum feasible quantity of one good for a given quantity of the other.

Substitution Effect

The effect that is only due to changes in the price or opportunity cost, given the new level of utility.

Income effect

The effect that the additional income would have if there were no change in the price or opportunity cost.

Bargaining Power

The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction.

Worker's Best Response Function

The optimal amount of work that a worker chooses to perform for each wage that the employer may offer.

Economic cost

The out-of-pocket cost of an action, plus the opportunity cost.

marginal rate of transformation (MRT)

The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier.

Pareto efficiency curve

The set of all allocations that are Pareto efficient.

Division of labor

The specialization of producers to carry out different tasks in the production process. Accomplished through markets and firms

Joint surplus

The sum of the economic rents of all involved in an interaction.

Marginal Rate of Substitution (MRS)

The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve.

Altruism

The willingness to bear a cost in order to benefit somebody else.

principal-agent relationship

This is an asymmetrical relationship in which one party (the principal) benefits from some action or attribute of the party (the agent) about which the principal's information is not sufficient to enforce in a complete contract.

Hidden Actions

This occurs when some action taken by one party to an exchange is not known or cannot be verified by the other. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working.

Constrained choice problem

This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce.

Reservation wage

What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job.

Players, feasible strategies, information, and payoffs

What four components make up a game?

opportunity cost

When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative.