Applied economics A

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Applied economics A
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2013-05-18 12:48:41
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notes for applied economics A
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  1. Theory explaining behaviour in penalty kicks?
    • The Minimax theorem (von Neuman,
    • 1928)

    • 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.
  2. Salient properties of zero-sum game?
    • 1.  
    • Given the
    • opponent strategy, probability of scoring (defending) the goal must be the same

    • 2.
    • The behaviour must be serially independent (not
    • possible to predict behaviour from the past)
  3. 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
  4. Other possible theory explaining penalty kicks?
    • K-level reasoning, Nagel, Games and economic behaviour, 1995, where players are trying to “outguess” the
    • opponent.
  5. 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.
  6. 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
  7. 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:
  8. 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
  9. 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
  10. Main features of K&T Prospect Theory?
    • ·       
    • Non-linear
    • weight functions:

    • o  
    • π(p),
    • overestimated weight of small pè π(p)>p for small p

    • o  
    • subcertainty-
    • π(p)+ π(1-p)<1

    • ·       
    • Value
    • function

    • o  
    • With a
    • reference point as the origin, which represents status quo

    • o  
    • Concave on
    • the side of gains, convex on losses implying risk aversion in gains and risk
    • loving in losses

    • o  
    • Loss
    • aversion, curve is steeper on the side of losses.
  11. Main features of Hyperbolic discounting?
    • ·       
    • Overconsumption
    • (or under savings)

    Procrastination, Time inconsistent behaviour
  12. Alternative theories to exponential and
    hyperbolic discounting?
    • ·       
    • 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
    • Economy.
    • 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.
  13. Evidence for the relevance of self-evaluated
    satisfaction to actual happiness?
    • There
    • 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.
  14. 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.

    • Sacks,
    • Stevenson, Wolfer, 2010, Leibniz Institute for Economic Research at the
    • University of

    • Munich,
    • 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.
  15. What could explain Easterlin Paradox?
    • Relative
    • 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)
  16. Quantity Theory of Money? Other interpretations?
    Fisher 1911,

    • ·       
    • 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.

    • Increase
    • 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.
  17. 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

    • ·       
    • Lowering
    • 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:

    • ·       
    • Fuel
    • 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
    • businesses.
  18. Discuss QE?
    • ·       
    • The
    • 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
    • recovery.

    • 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.
  19. Monetary regimes?
    • ·       
    • Monetarists -1930

    • o  
    • Increase in M è increase in P

    • o  
    • Price stability
    • nessecary/sufficient for long term stability

    • o  
    • No need for gov
    • int. as MP is enough to do so

    • ·       
    • Keynesians
    • 1930-1970

    • o  
    • Shift from M and
    • P to Y and employment

    • o  
    • Increase in M
    • does not have to translate to larger spending, fiscal policy must be used

    • o  
    • Modest role of
    • monetary authorities (LM curve)

    • o  
    • 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
    • 1950-1970

    • o  
    • Ms is no longer
    • exogenous interest rate created by business confidence

    • ·       
    • Neo-Monetarism

    • o  
    • Back to QTM,
    • where v (or k) is a stable function of monetary incomes

    • In
    • a short run, however, M can increase T

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