Midterm 1
Noncooperative game theory
Best response - the action that maximizes the player's payoff given her opponent's action Dominant strategy - an action that is always the best response regardless of the opponent's action Nash equilibrium - a situation in which both players are playing a best response to their opponent's action
The Theory of this Interaction: Cooperative Game Theory
A cooperative game is described by: Who the players are What actions are available to the players Cooperative actions May involve both an action (e.g., the sale of the car) and a transfer of resources from one player to the other (e.g., determined by the price of the used car). Noncooperative actions What could they do if they went it alone and did not cooperate? (e.g., when the car is not sold) Payoffs Cooperative payoffs depend on the joint decision & chosen transfer Noncooperative payoffs depend on each player's choice and that of their opponent if they do not cooperate These payoffs determine the threat values in bargaining since this is what each party would get if bargaining breaks down Cooperative Surplus = The difference between the total payoffs under the cooperative solution versus the noncooperative solution
Four ways to reduce crime
1.Increase catch probability 2.Increase sanction if caught •Need to consider the marginal sanction •Don't want the sanction for one crime to be "too high" if it means that the marginal cost of a more serious offense is zero! 3.Reduce the returns to crime •Better employment opportunities reduce crime 4.Make model apply better •Improving mental health reduces crime
Two ways to reduce crime
1.Increase catch probability •Costly 2.Increase sanction if caught •Cheap High optimal sanctions
How many cases do you think there were in Iowa last year?
661,302 cases 1 case per every 5 Iowans
Example: Reduce returns crime (improve the alternatives to crime)
Demand = Marginal Benefits of Crime Cost = Prob. of being caught * Sanction if caught
Example: Reducing Crime Demand? Cost?
Demand = Marginal net benefits of crime Cost = Prob. of being caught *Sanction if caught
Examples where legal system comes into play after soemthing bad happens
car hits a bike person murdered construction contract not fulfilled on time due to covid-19 supply chain issues
What are case types for civil and criminal
civil: small claims, divorce/family, estate and wills, tort, other civil Criminal: Misdemeanor, Felony, Juvenile
club good
nonrival excludable
Common resource
rival nonexcludable
Where do laws come from
•Can be a function of institutions, constitutions, etc
Contract law
•What can and can't be contracted on? •Sex, drugs, and rock and roll can't all be contracted on •What happens if I don't live up to my end of the contract? What should the default be?
Summary of Norms Right Whales
"Right of Capture" = "Finders-Keepers" Simpler rule for solving disputes Possible where whales did not fight as hard or dive as deep, so it was easier to keep ahold of a dying whale
Summary of Norms Sperm Whales
"Right of Harpoon" = "Dibs" Harder for solving disputes (what if there are two harpoons in the whale?) More valuable for sperm whales that fight harder --- making it harder to capture a dying whale "Whalers' norms not only did not mimic law; they created law." When the ownership of a dead whale was contested, judges invariably deferred to whalers' local customs even if they differed from those elsewhere.
What could the law do to improve the odds of reaching the efficient outcome?
2.Minimize transaction costs •If the law establishes simple and clear property rights, it will be easier for neighbors to reach agreements about parties & other incompatible uses • •If the law makes it possible for private parties to reach agreement easily, the efficient property right will arise regardless of whether legislators and the courts can figure out who values the property right more •You will have a party if you value the party more than I value my sleep and vice versa •The Normative Coase Theorem: •Structure the law to minimize transaction costs or "lubricate private bargaining"
Common law, civil law, or mixture of the two forms basis of legal systems covering ____% of the world's population, and ___% of the world's GDP
93 97
Stumpy Christmas Trees
A Pareto improvement occurs when a change makes at least one party better off without making anyone worse off •Whoville could achieve a Pareto improvement by solving the prisoner's dilemma •If both players waited for the trees to develop, both would be better off
Prisoner Dilemma
•This called a prisoner's dilemma •What makes this a "dilemma"? •Each player acting rationally in their own self interest leads both players to be worse off than if they cooperated •This prisoner's dilemma is bad for the players •They both get longer prison sentences than they could by cooperating •From the perspective of the players, the solution is inefficient •This prisoner's dilemma is good for society •Society wants to elicit more confessions •How do the police engineer the prisoner's dilemma? •Put the accomplices in different rooms so they can't coordinate •Offer a better deal to the accomplice who confesses •Without this break, it would be a Nash equilibrium for both to keep mum
Coase Theorem cont
Coase Theorem: In the absence of transaction costs, if property rights are well-defined and tradeable, voluntary negotiations will lead to efficiency. The initial allocation of property rights therefore does not matter for achieving efficiency provided there are no transaction costs (But if there are transaction costs, then the initial allocation can matter for efficiency... And the initial allocation of property rights under the legal rules will always matter for distribution!
Transaction costs cont
Coase: "in the absence of transaction costs, if property rights are well-defined and tradable, voluntary negotiations will lead to efficiency." This suggests that if there are transaction costs, voluntary negotiations may not lead to efficiency Car example (yet again) If transactions are costly, we may not trade And if we do trade, we incur that cost
Common law vs civil law
Common Law - Spontaneous order - Based on existing practices and social norms Bottom-up aggregate of many individual decisions -Decisions rely on evolving precedents Civil Law Planned order Based on "ancient sources and pure reason" Top-down decision-making Decisions rely on static law
Summary Common Law and Civil Law
Common Law - •The law mimics local practice, leading to bottom-up rules •The law is dynamic as precedence evolves •Laws can reflect the environment of the time and the place •If customs iterate towards maximizing wealth, this will be efficiency enhancing •Civil law •The law comes from first-principles, leading to top-down rules •The law is static and tends to be national rather than place-specific
Reducing Crime with Mental health care: Does improving mental health reduce crime, by reducing the perceived benefits and increasing the perceived costs of crime?
Data from South Carolina 1990-1993 birth cohorts enrolled in Medicaid at some point between 0 and 18 for those without mental health care diagnosis and a mental health diagnosis Shows huge Huge Differences in Incarceration Rates for Low Income Men with and without Mental Health Diagnoses and higher incarceration rates for Mental Health Diagnosis
Tort Law
•Torts come into play when someone harms someone else like the car hitting the bicyclist •Who should be responsible? What should they owe?
Which of these approaches is better depends on which of the following two costs is bigger
•Transaction costs •Information costs for the court to decide how to allocate the resourced
Property law
•What can be owned? •You "own" your iPhone but do you really "own" your kidney? And should you?
cooperative surplus
•When a potential buyer values the good more than the initial owner, there is a potential cooperative surplus from the negotiation
A Different Right for Every Use
•Within one room, there are a potentially infinite number of rights, divided by use and time • •Different people may hold rights to different uses at the same time • •Different people may hold rights to the same use at different times • •Under old view, ownership confers broad rights over property • •Under new view, property rights are much more narrowly defined, creating a potentially infinite number of property rights even to a single dorm room •Divorces the object from the rights
What is Property?
Old view Property = "objects" Ownership •Possess (and exclude) •Use Dispose (sell, give, or destroy "New" view (origin in 1800s Eng Property = "right of control" A different property right for each specific use •If I own a baseball bat, I can take it to the batting cage but cannot threaten or injure people with the bat •Property is then a "bundle of rights"
Common law - whaling - who owns a dead whale
Question: who owns a dead whale? 1700s-1800s - whales hunted for oil, bone, other valuable products A captured whale could be worth 3-4 times a typical family's yearly income Conflicts would sometimes arise over ownership
coase theorem p2
Ronald Coase (1960), "The Problem of Social Cost" In the absence of transaction costs, if property rights are well-defined and tradable, voluntary negotiations will lead to efficiency. It doesn't matter how rights are allocatedinitially... ...because if they're allocated inefficientlyat first, they can always be sold/traded... so the allocation will end up efficient anyway Initial allocation does matter for distribution, though And if there are transaction costs, may matter for efficiency too
What happens when the sperm whale fleet is governed by the Rule of Harpoons (Dibs)?
SRC= Opportunity Cost of Production = (Hours per Whale) * (Earnings in Alternative use of Hour) Since it takes fewer hours to kill each whale, the opportunity cost of production falls •This leads to a reduction in the price of whales and an increase in equilibrium quantities
Transaction costs
Search costs - which makes search easier •Standardized good or service •Few parties Bargaining costs - which makes bargaining easier •Symmetric information about the good •Clear, simple property rights •Friendly parties •Familiar parties Few parties Enforcement costs - which makes enforcement easier? •Instantaneous exchange •I hand over the money, you give me the good •No contingencies in the contract •Low costs of monitoring a long-term deal •Cheap punishments
Social Surplus
Social surplus or "wealth" = Consumer Surplus (CS) + Producer Surplus (PS) = ∑_(q=0)^(q="QRC" )"DRC(q) - SRC(q)" = How much consumers value whales - How much value producers could generate in an alternative activity
What about the law has been most connected to economisits?
Something happens which leads to litigaion which leads to a legal outcome - incentives - decisions - outcomes Everything that happens after the accident, affects the distribution of wealth in the economy, but not the total amount of wealth That's what lawyers are fighting over Everything that happens before the accident, affects the total amount of wealth in the economy That's what we, as economists, are interested in.)
Economic Model: assume the sperm whale fleet is governed by the Rule of Capture so using a less effective production function
Supply Rule of Capture = = Opportunity Cost of Production = (Hours per Whale) * (Earnings in Alternative use of Hour) Demand Rule of Capture = = Willingness to Pay for a Whale (WTP)
What happens if property rights get violated
Suppose we are in a world where I have "a right to quiet" but you really want to party • You decide to have a few friends over...and they invite a few friends...and before you know it, the whole University of Iowa study body is in the apartment next to mine. • What would happen if we took the case to court? Two possibilities: •Compensatory damages = "backward-looking" payment for damage done to the victim •The court could force you to pay me damages for my lost sleep •Injunction = a "forward-looking" court order clarifying someone's property rights and barring any future violation •The court could force you to stop holding parties (Or, in theory, both measures could be taken)
Damages vs injunctions
Suppose you & your friends would be willing to pay $100 to hold a monthly party and I would lose $25 each month from the loss of peace & quiet There are three possible legal rules: 1.A right to party: you are free to party 2.A right to damages for lost peace & quiet: I am entitled to compensatory damages of $25 from you 3.A right to an injunction to restore peace and quiet: I am entitled to an injunction forbidding you from partying
Christmas tree
Two players: The Grinch and Cindy Lou Who • Actions: The Grinch and Cindy Lou Who have recently planted two trees. They can cut down the young trees or wait for them to develop •A young, stumpy tree is worth $60 •A mature tree is worth $100 • Payoffs: •If both wait, both get mature trees in the future (worth $100 each) •If both cut down young trees, both get stumpy trees (worth $60 each) •If one waits while the other cuts down the young tree, •The one who waits gets no trees ($0) •The one who cuts down both stumpy trees now gets $120
Job of a judge
interpret the laws, relying heavily on precedent, or the way similar cases were decided in the past; precedent is relied for cases
Common law
rooted in common practices of the people, except where those practices have been superseded by legislation England and British colonies
What is the Law of Economics?
the study of scarcity People have agency, so we consider people's responses to laws Economics is not a set of facts, but instead a set of tools for predicting how people will respond to incentive, like those created by laws
Low transaction costs à injunctive relief
wWith low transaction costs, we expect parties to negotiate privately if the right is not assigned efficiently wBut... do they really? wWard Farnsworth (1999), Do Parties to Nuisance Cases Bargain After Judgment? A Glimpse Inside The Cathedral w20 nuisance cases: no bargaining after judgment "In almost every case the lawyers said that acrimony between the parties was an important obstacle to bargaining... Frequently the parties were not on speaking terms... ...The second recurring obstacle involves the parties' disinclination to think of the rights at stake... as readily commensurable with cash."
coase theorem
when transaction costs are small and property rights are well-defined, the original property-rights rule will not impact the efficiency of the outcome
Cute example but the Tragedy of commons is a real problem
• •Depletion of forests for logging or firewood • •Depletion of ground water for agriculture •Poaching of endangered animals • •Overfishing • •Overhunting (e.g., of buffalo and bison)
failure in bargaining
•A failure in bargaining occurs when the piece of property (in this case the used car) does not end up at its highest value use.
Public good definition
•A good is "nonrival" in consumption if... •One person's consumption of that good does not take away from another person's consumption of that same good •Many people can consume the good simultaneously • •A good is "nonexcludable" if... •Once it is provided, everyone receives the benefits derived from it, either because exclusion is impossible or simply too costly
Dominant Strategy
•An action is a dominant strategy if it the best response regardless of the other player's action •In this case, confessing always minimizes the sentence, regardless of Player 2's action •So, it is a dominant strategy to always confess! •The payoff matrix is symmetric •Player 1 and Player 2 are interchangeable, so confession is a dominant strategy for both players
Damages vs. Injunctions
•As Coase would predict, the rule for what happens when property rights are breached doesn't affect the outcome and total payoffs if bargaining succeeds •But the rule will impact the distribution of payoffs •The injurer (in this case the partier) prefers the damages rule •The damages rule gives the injurer the option to just violate and reimburse •The injuree's best threat value is 0 - I am at best made whole from the noise •The injuree (in this case me) always prefers the injunction rule •I have the power for the party not to happen: if the value of the party exceeds the damage done to me, I can extract some of this value in bargaining
A legal system that protects property rights
•Can improve efficiency •But may introduce its own costs • •We will spend time over the next few weeks thinking about the design of property rights that maximize efficiency
Tragedy of commons Stumpy Christmas Trees
•Each player has an incentive to deplete a commonly shared resource •Property rights can solve this problem
Bargaining and Property cooperative surplus
•For these teams, there was a potential gain from bargaining, or a cooperative surplus from agreeing to transfer the car from the person who valued it less to the person who valued it more
Takeaways from Spindletop
•If there is a common resource like oil in the reservoir, individual companies will tend to extract too much oil when acting independently and deplete the reservoir • •This is an example of a Prisoner's Dilemma, which leads to a Tragedy of the Commons • In theory, bargaining over the extraction to cooperate to limit drilling could improve both companies
"Common Law" in Common Parlance; Common Law Marriage
•In the 1877 case Meister v. Moore, the U.S. Supreme Court held that a non-ceremonial marriage was a valid enforceable marriage, unless a state's statute forbade it. •If it was "local custom" in the couple to act as if they were married, then the courts would recognize that partnership as "marriage-like"
Criminal law
•Is there an "efficient" amount of crime to aim for? How do we achieve it? •What are the sources of disparities in the criminal legal system? •What are the downstream consequences of interactions with the criminal legal system?
Iowa legal institutions
•Most legal cases begin in the county courthouse. • •Each of Iowa's 99 counties have its own courthouse. • •Handles both criminal and civil matters -In criminal cases, the state brings charges against an individual -In civil cases, one private party sues another
Classical Example: Prisoner's Dilemma
•Players: two accomplices commit a crime together •They are caught by the police, but the evidence is circumstantial: they could have been at the wrong place at the wrong time •The police take them to the station and interrogate them separately •Actions: Each accomplice can confess or keep mum •Payoffs •If neither confess, then both will get a sentence of 1 year •If both confess, then they will both get sentences of 3 years •If only one accomplice confesses, then •The confessor will get a sentence of 6 months for their cooperation •The other accomplice will get a sentence of 5 years
Open Range (Rancher's Rights)
•The farmer is responsible for keeping cattle off his property •He must bear the brunt of the costs of trampled corn
Introduce legal system and property rights
•The legal system can penalize farmers who steal their neighbors' crops • •Let's first suppose that we can always catch farmers for stealing
Threat value
•The threat value of each player are determined by their payoffs under the non-cooperative solution when bargaining breaks down •For a transaction to occur, each player must at least receive their threat value • •Once each player has received their threat value, the cooperative surplus can then be divided between the two players
Two Types of Law
(English) Common Law Civil (Napoleonic) Law Not to be confused with "civil" law (lawsuits brought by one private party against another) vs. "criminal" law (lawsuits brought by the state)
People no longer whale but they catch home runs and foul balls ... Who do you think should keep the ball? Same principles determine ownership of Barry Bonds' 73rd home run ball Alex Popov had the ball in his glove first, but lost it in the scrum Patrick Hayashi ended up with the ball, both wanted it
- Brian Gray, "Report and Recommendations on the Law of Capture and First Possession" (in the end, ball was sold for $450,000, proceeds were split 50/50)
Reducing Crime Does improving economic opportunity reduce the demand for crime?
- Re-arrest is concentrated (high) in the months immediately after release
What were case for
-Drive with an expired license -Go to misdemeanor court -Sell drugs -Go to felony court - -Don't pay your rent... -Go to small claims court - -Don't pay child support... -Go to family court -Hit a bicyclist in your car -Go to tort court
Market for Sperm Whales Producer Surplus
-Start by asking: is the whaler at q' making more in whaling than they could doing something else with their time? And if so by how much? -Yes, by the gap between PRC and SRC(q') = ∑_(q=0)^(q="QRC" )"PRC - SRC" (q) = How much you earn from whaling - how much you would earn from your next best activity
What could the law do to improve the odds of reaching the efficient outcome?
1.Assign property rights to the people who value them most •Establish a "right to quiet" if people tend to value quiet more than parties •Establish a "right to party" if people tend to value parties more than quiet •Regardless of the transaction costs, this would result in the efficient solution if the courts knew whether people valued quiet or parties more •The English philosopher Thomas Hobbes thought that people were naturally quarrelsome and so would rarely reach agreement even if transaction costs were low •Thought that the law should focus on efficiently assigning initial property rights •The Normative Hobbes Theorem: •Structure the law to minimize the harm caused by failures to bargain or minimize the reliance on bargaining
4 Fundamental Questions in Property Law
1.How are property rights established (or revoked)? •In the whaling example, what did it take to establish ownership? •Different norms in different places 2.What can be privately owned? •Not always straightforward, e.g., the ocean or ideas (patents) 3.What can (and can't) owners do with their property? 4. What are the remedies for violations of property rights? •Property rights on paper are meaningless unless they are enforced
Four Ways to Reduce Crime
1.Increase catch probability •e.g., put more police on the street 2.Increase sanction if caught •e.g., increase the fines for misbehavior 3.Reduce the returns to crime •e.g., increase the opportunity costs of crime by improving employment opportunities 4.Make model apply better •e.g., by improving mental healthcare access Economists often use data to evaluate these four ways of reducing crime
Three conditions for coase theorem to be held
1.Property rights must be well-defined... It must be clear on who has what rights to start with, so we know the starting point for negotiations 2.Property rights must be tradable... We need to be allowed to sell/transfer/reallocate rights if we want We must be assured that the resulting property rights will be respected 3.There can't be transaction costs It can't be difficult or costly for us to buy/sell the right So the coase theorem... In the absence of transaction costs, if property rights are well-defined and tradable, voluntary negotiations will lead to efficiency
Whaling: "Right of capture" = "Finders-Keepers"
British whalers in Greenland fishery Hunted right whales Hunting was done by harpoonattached to whaling boat by rope A harpooned whale attached to a boat was captured and belonged to the boat it was attached to If the whale broke free, other ships were free to pursue it If a dead whale started to sink and you cut the line to save your boat, someone else could recover the lost whale later •This rule discussed in Moby Dick •So under this rule, you had no claim to a whale unless it was attached to your boat by a rope •If a dead whale started to sink and you cut the line to save your boat, someone else could recover the lost whale later
What is the efficient remedy?
If the court can figure out the right damages to set, damages will lead to the efficient outcome even if bargaining breaks down •The partiers have the option to party and then pay for it, as they would under the cooperative solution •In general, damages internalize the externality: the potential injurer will have to pay for the costs they impose on others, and so these costs will factor into decision-making Thus, if we think that transaction costs are high and bargaining will likely break down, there is an efficiency motive for damages If we think that transaction costs are low, however, there may be a Coasean argument for injunctions •The damages awarded are unpredictable, but an injunctive order has a clear effect: the partying will stop •This clarity may lubricate private bargaining •Injunctions are also generally cheaper to administer: there is no need for the court to calculate the amount of harm done
Marginal Benefits and Costs of crimes Incentive effects
If the punishments for armed robbery and for armed robbery plus murder are the same, the additional punishment for the murder is zero - and asks whether you really want to make it in the interest of robbers to murder their victims.
The key: lack of transaction costs
If there were barriers to trade, then the initial allocation of property would matter for efficiency Otherwise, this is an example of what's called "The Coase Theorem"
Cindy Lou Payoff Matrix
Imagine that you are the Grinch. To find your best responses, consider each possible choice of Cindy Lou Who. •If you think Cindy will wait, what is your best response? •Cut down young trees! Because 120 > 100 •If you think Cindy will cut down young trees, what is your best response? •Cut down young trees! Because 60 > 0 The Grinch's dominant strategy is to cut down the young trees as it is for Cindy
Common Law England
In 12th century, King Henry II told judges to "go out and find the law" as it was already being practiced If some area had developed rules and customs for how people should act, that rule would become the law Goal: reduce aristocrats' dissent by decentralizing power
How does Mental Healthcare Affect Crime
In South Carolina, most people lose Medicaid eligibility at age 19. •For those who were on Medicaid immediately before 19, this creates a shift in mental healthcare access around 19 Losing Health care leads to 0.5 % point increase in incarceration and increase in crime
Nash Equilibrium
In a Nash equilibrium, no one player can do better by switching to a different action, given what everyone else is doing To find the Nash equilibrium, we want to circle the best responses to each action of the other player •Any cell with best responses of both players is a Nash equilibrium •Each player is playing a best-response to their opponent's action, so neither one can improve their payoff by changing their action unilaterally In this game, there is only one Nash equilibrium in which both players confess since this is the dominant strategy of both players
Example: Irrational Criminals Demand and Cost
Irrational criminals may overstate the short-term marginal benefits of crime and understate the long-term costs •Improving rationality could thereby reduce the demand for crime and increase the perceived price of crime • •Together this could lead to a large reduction in crime Demand: Perceived MB Cost 2> Cost 1: C1 =. perceived cost; C2= Real Cost
Reducing Crime with Mental Healthcare
Mental healthcare may have multiple impacts •Increase opportunity cost of crime •But also make the model more applicable •"Those with better mental health are more likely to understand — and be deterred by — the consequences of criminal activity"
Efficiency
None of the other cells of the payoff matrix offer a Pareto improvement •If one franchise released a movie in Nov rather than Dec, total gross revenues would increase from $450 million to $500 million, but the franchise that released in Nov would lose $25 million •However, there is still a potential Pareto improvement •Since total gross revenues increase with staggered releases, it would be possible (at least in theory) for the winning franchise (with a Dec. release) to compensate the losing franchise (with a Nov. release) to make them both better off • •We will primarily focus on the existence of potential Pareto improvements as our definition of efficiency •If there are no changes such that the winners could compensate the losers and make everyone weakly better off, then the equilibrium is efficient •(This is what the textbook calls Kaldor-Hicks efficiency) • •Under this definition, the Nash equilibrium between Marvel and DC is inefficient •It would be efficient to help Marvel and DC coordinate on their releases but not on, e.g., prices or quantities of movies
Civil Law
Originated following French Revolution Judges were viewed as "corrupt and worthless" Napoleon commissioned a group of legal scholars to draft a new set of laws - the Napoleonic Code Goal: Security of executive power from judicial interference Less reliance on historical norms and precedents Attempt to explicitly spell out the law, starting from blank slate Borrowed from 6th century Roman source Legal arguments appeal directly to written law, and commentary rest of central and south america, most africa, europe, and asia
Nash Equilibrium
The Nash equilibrium is for both the Grinch and Cindy to cut down young trees because neither can trust the other to wait
Payoff Matrix
The best response of each player maximizes her payoff given the choice of the other player Imagine that you are Player 1. To find your best responses, consider each possible choice of Player 2. •If you think Player 2 will keep mum, what is your best response? •Confess! Because -0.5 > -1 •If you think Player 2 will confess, what is your best response? Confess! Because -3 > -5
Iowa legal institutions
The counties are organized into judicial districts, each of which has a chief judge
Christmas Tree Farms
The owner of the Christmas tree farm has an incentive to let their trees fully mature •The owner won't sell stumpy trees today if it would be more valuable to sell mature trees down the line
Closed Range (Farmer's Rights)
The rancher is responsible for keeping cattle on her property She must pay for the costs of trampled
Coase theorem
This example was used by Coase in "The Problem of Social Cost" in 1960 Coase argued either law can lead to efficiency If it's cheaper for the farmer to protect his crops than for the rancher to control her herd... Under open range law, that's what he'll do Under closed range law, rancher can pay farmer to build fence The rancher & farmer will negotiate to the efficient outcome, regardless of which law is in place... ...as long as the rights are well-defined and tradable and there are no transaction costs Note there is no sense of blame here: Coase is interested in "efficiency," not "justice" And in some senses, both the farmer and rancher are "causing" the harm "It is true that there would be no crop damage without the cattle. It is equally true that there would be no crop damage without the crops."
Is this the efficient solution
This is another case of the Prisoner's Dilemma •Rational maximization leads to a worse outcome for both players than cooperation
Before bargaining threat values
Threat value - each side's anticipated outcome if bargaining fails "If we can't agree to a deal and we go our separate ways, how well off am I?" Deal has to make everyone better off than that!
Cooperative Game Theory
Threat value - the payoff each player can guarantee for himself if he doesn't agree to a deal Cooperative Surplus- increase in combined payoffs if a deal is reached
Another norm: "Right of Harpoon" = "Dibs"
Used in fisheries of sperm whales Sperm whales swim faster, dive deeper, fight harder Couldn't be attached to a boat without taking the boat down with it Hunted with harpoons attached to pieces of wood that would float behind the whale The ship would follow the whale until it tired, then kill it The rule that developed was akin to cattle branding: if you put a harpoon in the whale, then it is yours "Iron holds the whale" tended to be the rule in fisheries where sperm whales were hunted sperm whales swim faster, dive deeper, fight harder than right whales hunting them in old way would risk sinking the boat instead, harpoons were attached to "drogues" - pieces of wood or other materials that would float behind the whale and tire him out (like the empty barrels in Jaws) the ship would follow the whale until it tired, then kill it sperm whales also swim in schools - so when a ship stumbled into a school of sperm whales, most important to kill or wound as many as possible quickly, rather than stop to secure each one The rule that developed: "iron holds the whale" if you harpoon a whale first, you own it... that is, your iron (harpoon) stakes a claim to that whale... ...as long as you remain in "fresh pursuit" (you could also claim a dead whale with a "waif" - a pole with a flag - and come back for it later, allowing you to hunt multiple whales when you came upon a school)
Reducing Crime with Public Assistance Welfare reform in 1996 (Personal Responsibility and Work Opportunity Reconciliation Act, PRWORA)
Welfare reform in 1996 (Personal Responsibility and Work Opportunity Reconciliation Act, PRWORA) •In 1997, Iowa lifted the food-stamps ban entirely and limited the welfare ban to drug sales convictions
Reducing Crime Does improving economic opportunity reduce the demand for crime? Continued
What are the labor market opportunities at the time of release in the county? Low wages like the trough of a business cycle increases re-arrest by 2.3 to 4.0%.
Market for sperm whales Consumer Surplus
Where is Consumer Surplus (CS)? -Start by asking: is the consumer at q' WTP more than she has to for a whale? And, if so, how much? -Yes, by the gap between DRC(q') and PRC = ∑_(q=0)^(q="QRC" )▒"DRC(q) - PRC " = How much you would be willing to pay - How much you have to pay
Introduction to Game Theory
Who are the players What actions are available to each player What payoff each player will get as a function of the - their own action - the actions of other players
Legal sanctions
act like prices that people respond to like any other price
Example of Apply Ecconomics to Law: Reducing Crime; Price on y-axis and Q of crime on x-axis What is the demand? What is supply/cost?
demand = MB of crime Cost/Supply = Probability of being caught * Sanction if caught = Price set by the law (and legal system)
Economists tend to be more interested in what happens before lawyers get their cases. How do decisions affect outcomes:
how much value is created (or destroyed) by society
Pure public good
nonrival and nonexcludable
