political economy
Terms
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- Primitives
- exogenous technology endowments preferences people institutions
- Outcomes
- endogenous consumption production investment prices
- Pareto Optimality
- An allocation is PO if it is feasible and there is no other feasible allocation that Pareto dominates it- i.e. that makes one agent strictly better off and no other agents strictly worse off
- Contract Cruve
- locus of pareto optimal/ efficient allocations
- conditions for PO
- MRS (A, x1,x2)=MRS (B, x1,x2)=MRT (x1,x2)
- 1st Welfare Theorem
- If 1) markets are complete and competitive, 2) all goods are private goods, and 3) there are no production or consumption extenalities, then every competitive equilibrium is Pareto-optimal
- 2nd Welfare Theorem
- If 1)markets are complete and competitive, 2) all goods are private goods, and 3) there are no production or consumption externalities, then PO allocation can be achieved as a competitive equilibrium using only lump sum taxes and transfers.
- Types of SWF
- Utilitarian (Bentham) Samuelsonian Rawlsian
- Utilitarian SWF
- Sum of utility functions in a society. MRS=1, consstant, straight line. Weighted Utilitarian SWF puts alpha and 1-alpha in front. redistribution does not depend on relative levels of utility
- Samuelsonian SWF
- diminishing MRS-> redistribution DOES depends on relative levels of utility. Curved function. (ln) functions with alpha and 1-alpha in front.
- Rawlsian SWF
- Minimum function (L-shape). Infinite and Zero MRS-> redistribution DOES depend on absolute levels of utility.
- Efficiency
- Pric-free concept--> only depends on the primitives
- Equity
- summarized in the SWF--> not a primitive of the economy
- Social Planner Problem
- embeds both efficiency and equity considerations. exhaustive summary of economy
- SWF and Equity
- Marginal contribution of every individual to overall welfare of society based on a particular SWF must be the same for every individual.
- Normal Form Games
- Players take simultaneous actions. (Nash)
- Extensive Form games
- Players take sequential actions (subgame perfect equilibrium)
- Primitives of the Game
- players, strategies/actions, payoffs
- Nash Equilibrium
- A Nash equilibrium is a pair of strategies (one from each player such that no player has an incentive to deviate from his strategy given the strategy of his opponent. (Best Response)
- Subgame Perfect Equilibrium
- A subgame perfect equilibrium is a pair of strategies (one for each player) which is a nash equilibrium at each decision made. Solve by backward induction (tree diagram)
- Arrows Impossibility Theorem
- If there are 3 or more alternatives, then there does not exist a voting role that satisfies the following 4 properties: 1) Unilateral Domain 2) Unanimity 3) Non-Dictatorship 4) Independence of Irrelevant alternatives
- Unilateral Domain
- all preferences profiles are allowed (ranking of alternatives by individuals)
- Unanimity
- if everyone is society agrees on what the best alternative is, then that alternative is chosen
- Non-Dictatorship
- There is no individual such that his/her preferences always determine which alternative is chosen regardless of the preferences of everyone else in society.
- Independence of Irrelevant Alternatives
- The ranking between any pair of alternatives for society only depends on the way each individual ranks these two alternatives independently of individual preferences over other (irrelevant) alternatives.
- Condorcet Winner
- A CW (if it exists) is a n alternative which defeats all other alternatives in pairwise majority comparisons. If a CW exists, it is unique and the sequence of votes under sequential majority rule does not matter.
- Condorcet Loser
- A CL (if it exists) is an alternative which is defeated by each other alternative in pairwise majority comparisons. If it exists, it is unique.
- Condorcet Consistent
- A voting rule is Condorcet Consistent if it selects the CW whenever a CW exists.
- Sequential Majority Rule
- Condorcet Consistent Never selects a CL
- Plurality Rule
- Not Condorcet Consistent With runoff is not Condorcet consistent. May select a CL With runoff never selects CL.
- Advantages of Plurality Rule and Borda Count
- Can't manipulate exogenous factors to influence winner.
- Median Voter Theorem I
- If the space of alternatives is unidimensional and ordered, if the preferences (i.e. the indirect utility function) of all voters are single-peaked, then: 1) a CW always exists 2) The CW is the median of the distribution of "peaks" (i.e. most preferred alternatives) in the population of voters.
- Median Voter Theorem II
- If the space alternatives is unidimensional and ordered, if there exists one variable or index such that all individuals can be ordered according to that variable and preferences are monotonic in that variable then: 1) there exists a CW 2) the CW is the alternative mose preferred by the individual with the median index.
- Downsian Model
- 2 Candidates Elected Candidate chooses a policy. Set of votes N with prefs V(x) Promises are binding. Winning is only goal.
- Implications of Downsian Model
- Policy Convergence Equivalence of direct democracy and representative democracy
- Three candidate Downsian Model
- not a Nash equilibrium with all at Xm because if one deviates, he wins.
- Public Good
- Rival in consumption, excludable.