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Week 10 notes

by: Taryn manciu

Week 10 notes Econ201

Taryn manciu
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Keaton Miller
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This 10 page Class Notes was uploaded by Taryn manciu on Thursday December 3, 2015. The Class Notes belongs to Econ201 at University of Oregon taught by Keaton Miller in Fall 2015. Since its upload, it has received 42 views.


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Date Created: 12/03/15
Week  10  Tuesday     Labor     Factor  1:  Skill-­‐biased  Technical  Change   -­‐New  innovations  are  complements  for  skilled  labor,  but  substitute  for  unskilled   labor.  Impact  on  demand?           Economics  of  superstars   -­‐How  Internet  (and  communication  tech)  impacts  return  tp  being  the  best   -­‐The  best  singer  in  the  world  limited  in  number  of  people  they  can  sing  to  at  one   time   -­‐2  best,  3  best,  100  best  probably  make  close  to  the  same  amount  as  the  best   -­‐Now  rerecorded  music  comes  out   -­‐Best  singer  can  now  sell  to  everyone   th -­‐No  one  cares  about  100  best     -­‐Winner  takes  all  scenarios   -­‐Skilled  worker  at  that  time:  skilled  craftsman  who  has  learned  a  trade  after  a  long   apprenticeship   -­‐Unskilled  worker:  hands  and  arms  connected  to  a  strong  back   -­‐Technological  change  at  time  (Henry  Fords  assembly  line)  takes  unskilled  worker   and  put  him  on  an  assembly  line.  Up  to  speed  in  a  few  days   -­‐This  is  unskilled-­‐biased  tech.  change   In  this  period  there  was  a  decline  in  the  skill  premium.               Factor  2:  Expansion  of  trade  and  immigration   -­‐Why  should  that  raise  the  skill  premium  in  the  U.S?   -­‐Ratio  of  skilled  to  unskilled  in  the  U.S  is  high  relative  to  rest  of  world   -­‐With  expansion  of  trade,  tend  to  export  goods  with  high  skill  content  (pacemakers,   ipads)  and  import  goods  with  low  skill  content  (sneakers)   -­‐Expanding  trade  reduces  demand  for  unskilled  labor  in  U.S,  increases  demand  for   skilled  labor     Factor  3:Decline  of  Unions   -­‐This  is  not  a  demand  shift  but  rather  a  change  in  market  power  of  the  unskilled   -­‐Unions  declined  significantly  over  the  past  30yr.  Production  (“blue  collar”)  jobs   much  more  likely  to  be  unionized  than  “white  collar”  management  jobs     The  99%  and  the  1%   -­‐There  is  increasing  inequality  even  within  the  upper  range  of  income  distribution   -­‐“Haves”  starting  to  complain  about  the  “have  mores”   -­‐“Have  mores”  rising  relative  to  the  “haves”     How  do  we  explain  increase  of  returns  at  the  very  top?   -­‐Extreme  skill-­‐biased  tech.  change   -­‐Return  to  a  very  special  talent  has  gone  up   -­‐Economics  of  superstars  (easier  to  leverage  talent)   -­‐Return  to  special  talent  always  there,  but  past  social  norms  limited  pay  differences   -­‐Looting.  The  0.01%  has  figured  out  a  new  way  to  work  the  system  to  redistribute   the  economic  social  pie  to  themselves,  including  busting  unions  (occupy  wall   street’s  explanation)     Example  of  Theory  1:  Return  to  Talent       What  about  other  countries?   -­‐In  terms  of  other  countries,  seem  to  be  a  difference  between  “Anglo  countries”  and   others   -­‐Canada  in  “U.S.  Light”   -­‐U.K  in  “U.S  Lighter   -­‐Japan  and  France  completely  different   -­‐If  this  is  all  skill-­‐biased  tech.  change,  why  are  Anglo  countries  different?   -­‐One  possible  explanation:  France  isn’t  paying  market  wages   Why  do  workers  in  the  same  country  get  different  wages   -­‐In  competitive  markets,  people  with  the  same  skills  receive  different  wages  if   working  conditions  vary     -­‐Compensating  differentials   -­‐In  Competitive  markets,  people  with  different  skills  and  ability  will  get  different   wages     -­‐Wage  includes  a  return  to  human  capital   -­‐If  labor  markets  are  NOT  competitive,  workers  of  equal  ability  might  receive   different  pay     -­‐Union  workers  get  20%  more  than  non-­‐union  worker.       Discrimination   -­‐Two  types  of  workers,  type  and  type  b,  with  equal  ability   -­‐Suppose  there  are  two  kinds  of  firms,  biased  and  unbiased     -­‐Biased  firms  refuse  to  hire  type  b     -­‐Unbiased  firms  don’t  care;  will  hire  whichever  type  is  cheapest     -­‐Different  demand  curve  for  biased  and  unbiased^     Analysis  of  equilibrium:  Wb<Wa   -­‐Biased  firms  know  they  can  pay  less  for  type  b  workers,  but  they  refuse  to  hire   them.  The  wage  Wa  is  where  the  demand  for  type  A  workers  by  biased  firms  =  all  of   the  supply   -­‐Since  Wb<Wa,  unbiased  firms  wont  hire  any  type  A  workers  since  they  are  too   expensive   -­‐They  offer  Wb  to  both  kinds  of  workers,  but  only  type  B  workers  will  accept  these   wages   -­‐Could  we  draw  things  differently  and  have  an  equilibrium  with  Wb>Wa?     Long  run  with  biased  firms   -­‐Biased  firms  pay  higher  wages  for  same  quality  labor  so  biased  firms  have  higher   average  cost  than  unbiased  firms   -­‐Long  run,  low  cost  firms  tend  to  drive  high  cost  firms  out  of  the  market   -­‐Conclusion:  in  discrimination  is  due  to  preferences  by  firms,  expect  market  forces   to  work  toward  driving  the  discrimination  out  of  the  market         Customers  care  but  firms  don’t   -­‐if  discrimination  is  due  to  preferences  by  consumer  about  the  kinds  of  workers  that   get  hired,  we  do  not  expect  market  forces  to  work  towards  driving  the   discrimination  out  of  the  market     Asymmetric  Information  and  Moral  Hazard   -­‐How  did  we  get  here?   -­‐Started  wit  the  first  welfare  theorem   -­‐Assumed  no  externalities,  no  monopoly,  then  the  free  market  outcome  in  efficient     -­‐Embedded  assumption:  an  assumption  market  at  a  low  level  in  your  model   -­‐Generally  don’t  realize  it  is  an  assumption   -­‐Often  comes  up  in  discussions   -­‐Assumed  full  information:  everyone  in  the  economy  knows  everything  relevant   to  his  or  her  decisions   -­‐This  doesn’t  mean  everybody  has  to  know  everything!  Just  relevant  things   -­‐In  Reality?  Do  YOU  know  everything  that’s  relevant  to  your  studying  decisions?     Imperfect  information  is  hard  to  deal  with   -­‐Economists  started  thinking  about  this  40yrs  ago   -­‐Want  to  understand  case  when  nobody  knows  anything   -­‐Need  to  understand  lots  of  probability  theory     -­‐Still  need  to  make  some  sort  of  assumptions  about  what  the  possible  values  of  truth   are   -­‐Why  is  this  a  problem?     -­‐Example:  CO2  emissions     -­‐Micro  theory  says:  this  is  an  externality,  just  apply  Pigouvian  tax  and     we’re  good  to  go!     -­‐Congress  turns  to  environmental  scientists  and  say  “how  much  should  we     charge”     -­‐Large-­‐scale  problem:  market  may  not  be  efficient,  but  government  may     not  have  an  answer  either!     We  will  focus  on  asymmetric  information   -­‐Main  idea:  the  “truth”  about  some  decision-­‐relevant  information  is  known  to   some  market  participants,  but  is  hidden  from  others   -­‐Useful  because  math  becomes  much  easier  to  deal  with   -­‐Models  many  real  life  situations  pretty  well   -­‐Most  imperfect  information  scenarios  can  be  reduced  to  this  scenario                 2  Kinds  of  hidden  information   -­‐Hidden  action     -­‐Someone  takes  an  action  that  affects  you,  but  you  know  about  it     -­‐Leads  to  moral  hazard   -­‐Hidden  Characteristics     -­‐Someone  has  some  ability  that  you  depend  on,  but  don’t  know  about  it     -­‐Leads  to  adverse  selection     Illustrate  hidden  actions  with  the  insurance  industry   -­‐What  is  the  hidden  action?   -­‐People  who  are  covered  by  an  insurance  policy  may  take  actions  to  reduce  (or   increase)  the  probability  of  an  accident  happening   -­‐Ex.  Over  insurance  can  lead  to  hazard  for  a  person’s  morals  which  is  where  we  get   the  name  moral  hazard   -­‐Ex.  Employer/Employee  relationship  –  should  we  pay  flat  salary  or  commission?     -­‐Hidden  action:  workers  performance     -­‐If  paid  commission  worker  bears  more  risk  and  has  stronger  incentives     (can  cause  other  problems)   -­‐The  selection  of  people  who  purchase  the  water  damage  coverage  will  be  adverse   from  the  perspective  of  the  insurance  company   -­‐Main  problem  with  credit  cards:  people  that  call  up  and  ask  credit  cards  are   adversely  selected  and  a  much  bigger  risk  that  others  (even  if  they  have  the  exact   same  credit  info!)   -­‐New  law  makes  it  illegal  to  base  insurance  rates  on  pre-­‐existing  conditions,  get   adverse  selection   -­‐One  side  of  the  market:  informed.  Other  side:  Uninformed   -­‐Screening:  when  uniformed  does  something  to  try  to  separate  out  the  good   -­‐Signaling:  when  informed  does  something  to  signal  he  or  she  is  one  of  the  good   ones     Moral  Hazard  and  Too  Big  to  Fail  (TBTF)   -­‐Bankruptcy  process:  GM,  Chrysler  bankruptcies  not  disruptive  (in  relative  sense)   -­‐Many  argue  banking  is  different   -­‐So  incentive  for  government  to  step  in  and  not  let  huge  banks  go  into  bankruptcy                           Week  10  Thursday   Economics  of  Matching,  employment,  marriage,  and  Tinder.       288  people   400  points  available     -­‐How  should  Bucky  allocate  a  budget  between  pizza  and  beer?   -­‐How  much  should  a  monopolist  produce?   -­‐Should  a  plant  shut  down?     Many  decisions  are  discrete   -­‐Choose  one  cell  phone,  not  2.7   -­‐Spring  break  in  Cancun  or  South  Padre?   -­‐Matching,  where  agents  from  two  different  groups  want  to  form  a  pair   -­‐Even  worse:  at  least  every  nexus  6P  is  identical!  People  are  not.       More  embedded  assumptions  crept  into  our  markets   -­‐Thinness:  lots  of  actors  on  both  sides  of  the  market  to  transact  with  each  other     -­‐When  we  moved  from  stair-­‐step  marginal  cost/benefit  graph  to  a  linear     one   -­‐Uncongested:  Actors  in  the  market  have  a  lot  of  time  to  consider  alternative   transactions  and  make  the  transaction  they  want     -­‐Experiment  2    (making  burgers  and    fries):  not  a  lot  of  time  to  consider     trades  or  purpose  alternatives     -­‐Safe:  Actors  can  reliably  reveal  or  act  upon  their  information  without  fear  or   negative  market  consequences.     -­‐President  Schill  asking  students  how  much  college  is  worth  to  them.     How  can  we  analyze  these  types  of  decisions  and  markets?   -­‐In  Realland,  lots  of  complicated  factors,  people  move  around,  job  requirements  and   responsibilities  change,  life  events  force  adaptation.   -­‐Thickness  and  congestion  of  market  in  endogenous-­‐  actors  within  the  market  can   choose  them  (to  some  extent)   -­‐As  always,  we  have  to  simplify   -­‐Plan  of  attack     -­‐Start  with  theory-­‐  write  down  simplest  model  and  see  what  we  can  learn     -­‐Move  toward  real  world     -­‐Look  at  examples     The  two-­‐sided  matching  market   -­‐We  have  an  equal  or  two  types  of  people   -­‐Each  person  has  preference  over  every  person  of  the  other  type     -­‐Heterosexual  men  and  women     -­‐Employers  and  employees     -­‐Graduate  school  applicants  and  admissions  committees     -­‐Organ  donors  and  organ  recipients       Key  theoretical  question   -­‐Can  we  find  a  matching  that  is  both  complete  and  stable?   -­‐Matching:  a  list  of  pairs  of  people  in  the  market  (A,  3)(B,  1)(C,  2)   -­‐Complete:  Every  person  in  the  market  is  matched  with  someone  else     -­‐you  get  a  match,  and  you  get  a  match  and  you  get  a  match!   -­‐Stable:  There  are  no  two  people  in  the  matching  such  that  each  of  them  prefers  the   other  over  their  match     -­‐Donald  is  married  to  Jane,  Edward  is  married  to  Laura,  but  Donald  would   prefer  to  be  with  Laura  and  Laura  would  prefer  to  be  with  Donald.     Answer…  YES!   -­‐Very  famous  result  from  Gale  and  Sharply  in  1962   -­‐If  there  are  an  equal  number  of  participants  on  both  sides,  and  each  participant  has   a  completely  stick  preference  ordering  over  the  opposite  side,  then  a  stable   matching  exists     -­‐Compete:  I  have  preferences  over  all  of  the  people  in  the  other  side  of  the     market     -­‐Strict:  There  are  no  ties/indifferences  in  my  preferences  -­‐  I  can  “strictly”     prefer  one  alternative  to  another   -­‐How  do  you  prove  this?  Find  the  stable  matching     Gale-­‐Shapley  algorithm:  Deferred  Acceptance  Proposals   1. Each  man  m  proposes  to  his  first  choice   2. Each  woman  looks  at  the  proposals  she  has  received,  “holds”  the  best  one,   and  rejects  the  others   3. Each  man  who  was  rejected  makes  a  new  proposal  to  the  next  highest  choice   who  hasn’t  yet  rejected  him.   4. Each  woman  holds  her  most  preferred  acceptable  offer  to  date  and  rejects   the  rest   5. Repeat  3  and  4  until  no  more  proposals  are  made       This  is  generalizable   -­‐Following  this  algorithm  generate  a  proposer-­‐optimal  matching     -­‐It  is  impossible  to  find  a  matching  that  is  complete  and  stable  that  each     proposer  would  like  at  least  as  much  as  the  one  generated  by  the     algorithm   -­‐That  matching  might  be  significantly  different  from  the  acceptor-­‐optimal   matching   -­‐Intuition:  when  you  are  the  proposer,  you  can  go  straight  to  your  first  choice  and   see  if  it  works  out.  If  it  doesn’t  you’d  never  be  able  to  get  it  anyway   -­‐Can  acceptors  do  anything  to  improve  their  outcome?     -­‐LIE!     -­‐Acceptor  1  could  reject  prosper  A  over  proposer  B  (even  though  1  may     prefer  B  to  A)     -­‐Proposer  A  then  goes  to  acceptor  2,  who  currently  is  “holding”  C     -­‐C  proposes  to  1,  who  prefers  C  to  both  A  and  B     -­‐In  fact:  no  matching  mechanism  exists  for  which  truth  telling  is  a     dominant  strategy  for  every  agent       -­‐There  is  an  incentive  for  someone  in  the  market  to  lie     -­‐In  other  words,  a  matching  market  is  not  safe  because  people  who  tell  the     truth  may  be  worse  off  than  people  who  lie     -­‐Of  course,  you  can  only  lie  if  you  know  enough  information  to  make  it     effective     Match  clearinghouses  exist  in  some  markets   -­‐New  doctors,  applying  for  their  residency     -­‐Hospitals  are  the  proposers,  doctors  are  the  acceptors   -­‐Grad  students  in  NYC  and  Boston     -­‐Schools  are  prospers,  doctors  are  the  acceptors   -­‐Kidney  exchange     -­‐I  can  donate  a  kidney  to  A,  A  can  donate  to  B,  B  to  C,  and  so  on  until  my     friend  gets  a  kidney     What  about  one-­‐sided  matching?   -­‐Roommates,  bridge-­‐partners,  non-­‐heterosexual  partners?   -­‐Also  happens  when  one  side  in  a  market  isn’t  an  active  participant     -­‐Assigning  people  to  rooms  in  a  dormitory                       A  stable  matching  might  not  exist   -­‐A,  B,  and  C  are  the  most  preferred  person  for  someone   -­‐In  any  solution,  one  of  A,  B,  or  C  must  be  paired  with  D  and  the  other  two  with  each   other   -­‐Whoever  is  partnered  with  D  will  have  someone  else  who  rated  him  or  her  highest   -­‐The  person  who  is  partnered  with  D  prefers  anyone  to  D         We  use  a  search  model  to  understand  real-­‐world  behavior   -­‐Can  think  of  potential  applications  as  coming  from  a  pool,  with  a  distribution  of   quality   -­‐The  higher  their  quality,  the  higher  their  marginal  product   -­‐Costly  search-­‐  firms  can  spend  some  effort  to  take  a  draw  from  the  distribution   and  learn  about  their  quality  (interview  process)   -­‐When  should  the  firm  make  an  offer?       Solve  search  model  with  a  cutoff  strategy   -­‐Set  a  cutoff  level  of  quality  in  your  distribution  that  depends  on  the  marginal   product,  the  probability  of  getting  someone  above  the  cutoff,  and  the  cost  of   searching   -­‐Keep  taking  draws  from  the  distribution  until  you  find  someone  above  the  cutoff         In  the  real  world,  use  multiple  stages   -­‐Costs  can  be  incredibly  high,  particularly  if  you  hire  (or  marry!)  the  wrong  person.   So  implement  a  staged  cutoff  system     -­‐Application  stage     -­‐Interview  stage     -­‐Probationary  period     -­‐Promote  from  within     -­‐At  each  level,  gain  more  information  about  quality  of  person  (screening)     and  choose  whether  to  progress     -­‐People  also  use  other  signals  to  determine  quality  –  doesn’t  always  work     -­‐If  you  have  a  nice  car,  you  probably  make  a  decent  amount  of  money  (but     might  be  a  jerk)     -­‐If  you  volunteer  to  support  the  homeless,  you’re  probably  a  nice  person  (but     might  just  be  doing  it  to  look  like  a  nice  person)     -­‐Too  much  moral  philosophy  for  my  blood!                        


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