Applied economics A
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Theory explaining behaviour in penalty kicks?
- The Minimax theorem (von Neuman,
- For every two-person, zero-sum game with finitely many strategies, there exists a value V and a mixed
- strategy for each player, such that
- (a) Given player 2's strategy, the best payoff possible for player 1 is
- V, and
- (b) Given player 1's strategy, the best payoff
- possible for player 2 is −V.
Salient properties of zero-sum game?
- Given the
- opponent strategy, probability of scoring (defending) the goal must be the same
- The behaviour must be serially independent (not
- possible to predict behaviour from the past)
Empirical evidence for and against penalty kick
following the Maximin theory?
- For: Palacios-Huerta, Review
- of Economic Studies, 2003.
- Study of close to 1500 penalty kicks, proved both salient points of equal
- payoffs of pure strategies and serial independence
- Against: Wooders, Econometrica (2010) found
- evidence for negative serial correlation of prof players
Other possible theory explaining penalty kicks?
- K-level reasoning, Nagel, Games and economic behaviour, 1995, where players are trying to “outguess” the
Why ex ante estimates of the benefits of mega
events differs substantially from the actual?
- 1. Measurement error: estimates
- hugely dependant on often not measurable assumptions
- 2. Substitution effect: domestic
- consumers coming to the event spend the money on the event instead of other
- domestic entertainment, the same applies to visitors coming for different
- reasons than the event
- 3. Time-switching: the event makes the
- visitors come, but they would come anyway some other time
- 4. Crowding-out: the fact of the event
- discourages non-event visitors from paying a visit because of difficulties
- associated with the event (traffic, hotel prices)
- 5. Leakages: Many benefits are
- transferred away from the local economy, taken by the federation or gathered in
- capital gains by hotels, and then transferred.
- 6. Not calculating the benefits after
- the event
- 7. Externalities:
- Traffic, construction-time inconvenience, vandalism, environmental pollution,
- feel good factor etc.
Who shows that ex ante benefits are way larger
than actual benefits?
- Coates, 2010, on the basis of the world cup in 1994 in US, the overall income from it
- was negative 9B when was expected to be positive 4B
Model explaining overbidding?
- Pomfret, Willson and Lobmayr (2009) created a PWL model which describes that, Lobbyist
- are pressing governments to press over-bid the event, main equations:
4 Axioms of Expected Utility Theory?
- 1.Completeness- always
- possible to evaluate prospects
- 2.Transitivity- if
- a>b and b>c => a>c
- 3.Continuity- if
- a>b>c => there is p, such that prospect (a,p;c,(1-p))=b
- 4.Independence: if a=b => az=bz, adding
- identical part to prospects should not change their relative evaluation
Which axioms and assumption are proved to be
broken in experimental results? Example?
- 1. The independence
- axiom, for example :A=(1000,1) or
- B=(1000,0.89;5000,0.1) C=(1000,0.11) or
- D=(5000,0.1) is inconsistent, as
- eliminating 0.89 chance of getting 1000 in both bets should not change the
- ordering. This is called Allais paradox (1953)
- 2. The reflection effect and loss aversion: A=(3000,1) or B=(4000,0.8) but A=(-3000,1) or B=(-4000,0.8), risk aversion in positive domain is accompanied by
- risk loving in losses
Main features of K&T Prospect Theory?
- weight functions:
- overestimated weight of small pè π(p)>p for small p
- π(p)+ π(1-p)<1
- With a
- reference point as the origin, which represents status quo
- Concave on
- the side of gains, convex on losses implying risk aversion in gains and risk
- loving in losses
- aversion, curve is steeper on the side of losses.
Main features of Hyperbolic discounting?
- (or under savings)
Procrastination, Time inconsistent behaviour
Alternative theories to exponential and
- Read, et al. 2005., date/delay effect, when future dates are
- expressed as calendar dates rather than delay times there is no evidence for
- hyperbolic discounting.
- Laibson, 2001, The Quartelty Journal of
- economics, A Cue Theory of Consumption. People react to the cues which increases their marginal utility of
- consumption in a given moment. Therefore, knowing that the cues may happen In
- the future, the need for commitment devices exists.
- Becker and Murphy, 1988, Theory of Rational Addiction, the Journal of Political
- Agents receives utility form the “consumption capital” gathered by previous
- consumption of given good, which could lead to “rational addictions” and thus
- time inconsistent behaviour.
Evidence for the relevance of self-evaluated
satisfaction to actual happiness?
- is evidence that self-evaluated happiness surveys represent true happiness, as
- shown by comparison of happiness surveys and “compensation differentials” Oswald and Wu, 2010, Science. When people have to pay more for their houses, the
- happiness levels are higher, showing that they need to “pay” for the happiness.
What is Easterlin Paradox? Rebutting work?
- Started by the Easterlin, 1974 work, and developed
- further by him in 90ties, the fact that on national level and cross country
- comparison shows positive correlation between income and satisfaction, but the
- long term GDP growth in time series has that correlation not significantly
- different than nil, at least in the developed nations.
- Stevenson, Wolfer, 2010, Leibniz Institute for Economic Research at the
- University of
- showed that there is significant positive correlation
- between long term GDP growth and satisfaction changes. They results were
- however highly dependent on two outliers, south Korea and Hungary, without them
- results insignificant from zero.
What could explain Easterlin Paradox?
- Income Models, Clark, et al. 2007,
- Journal of Economic Literature,
- where utility is not only the function of absolute income but of the
- income relative to the rest of the society, or past income. It explain the
- Easterlin Paradox, as well as may lead to “arms race” in income production
- which is not optimal from the social point of view (PD)
Quantity Theory of Money? Other interpretations?
- M or V could be a
- dependant variable to P or T. Higher prices could be the cause, not the result
- of the increase of money supply- more, or expensive transaction could press
- money supply to grow or make it circulate faster.
- in M could be offset by lowering V (e.g. banks not willing to lend), in short
- term Prices may remain stable and the amount of transactions could rise.
How does monetary policy work? When it doesn’t?
What can CB do instead?
- Money supply increases
- prices/output/demand via:
- Lowering interest
- rate, pushing away from bonds and encouraging private investment/consumption
- and lowering interest payments
- exchange rate and increasing export
- The base interest
- rates, however, could be useless in the case of the “liquidity trap”, where the
- nominal interest rate cannot be decreased below zero. (you know the diagrams).
- As the zero bounds occurs only with the base rate which may not translate to
- the interest born by businesses. Thus, a CB can:
- inflation expectations and thus lower real interest rate (shift down LM) (Krugman’s blog, Fed keeping low IR even
- when economy picks up)
- Start QE directly affecting rates for
- effectiveness of QE was shown in
- Driffill, Miller, 2011, CEPR where based on Kiyotaki and Moore 2008 model they show that QE is vital for the
- The effectiveness of QE argued by David Miles speech, 2012, BoE MPC member
- Also, the QE is not used to monetise the government debt and create inflation- he shows that it was nessecary to
- avert recession, deflationary pressures and thus fall in inflation. The
- interest rate for businesses were on so high levels that it was endangering the
- economy and QE helped to bring them down.
- Increase in M è increase in P
- Price stability
- nessecary/sufficient for long term stability
- No need for gov
- int. as MP is enough to do so
- Shift from M and
- P to Y and employment
- Increase in M
- does not have to translate to larger spending, fiscal policy must be used
- Modest role of
- monetary authorities (LM curve)
- In bad time
- liquidity preference is falling (increasing k in M=kPT or decreasing V in
- MV=PT) as people hoards money. Thus, monetary expansion would have to be large
- to affect the economy- hard to do
- Golden Keynesians
- Ms is no longer
- exogenous interest rate created by business confidence
- Back to QTM,
- where v (or k) is a stable function of monetary incomes
- a short run, however, M can increase T
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