Applied economics A
Card Set Information
Applied economics A
notes for applied economics A
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
(b) Given player 1's strategy, the best payoff
possible for player 2 is −V.
Salient properties of zero-sum game?
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?
: 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
: 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
hugely dependant on often not measurable assumptions
2. Substitution effect
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
: the event makes the
visitors come, but they would come anyway some other time
: the fact of the event
discourages non-event visitors from paying a visit because of difficulties
associated with the event (traffic, hotel prices)
: 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
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?
possible to evaluate prospects
a>b and b>c => a>c
a>b>c => there is p, such that prospect (a,p;c,(1-p))=b
: 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?
overestimated weight of small pè π(p)>p for small p
reference point as the origin, which represents status quo
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
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
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
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
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
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