Scribd
Upload
11 views

Institutional_Economics_Notes_Chapter_2_and_3

Institutional_Economics_Notes_Chapter_2_and_3

Uploaded by

brhanetesfay4712
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
11 views

Institutional_Economics_Notes_Chapter_2_and_3

Institutional_Economics_Notes_Chapter_2_and_3

Uploaded by

brhanetesfay4712
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Institutional Economics: Notes for

Chapter 2 and Chapter 3


Chapter 2: Introduction to Behavioral Economics

2.1 Individual Decision Making

- **Choice under Certainty**: Decision-making occurs when all possible outcomes and their
probabilities are known.
- Individuals are assumed to make decisions that maximize their personal utility or
satisfaction.
- Example: A consumer choosing between two known products based on their price and
quality.
- Assumptions: Individuals act rationally, decision-making is based on complete
information, utility can be quantified and maximized.

- **Judgment under Risk and Uncertainty**:


1. **Risk**: Known probabilities of outcomes.
2. **Uncertainty**: Unknown probabilities and unpredictable future events.

- **Expected Utility Theory (EUT)**: Decision-making theory that evaluates choices by


calculating expected outcomes.
- **Prospect Theory**: Developed by Kahneman and Tversky, explains **loss aversion**
and the **framing effect**.

- **Intertemporal Choice**: Decisions involving trade-offs between immediate and future


rewards.
- Discount rates: Higher discount rates mean less value is given to future rewards.
- **Hyperbolic Discounting**: People overvalue immediate rewards, leading to
procrastination.

2.2 Strategic Decision Making

- **Classical Game Theory**: Decision-making where outcomes depend on others' choices.


- **Nash Equilibrium**: Stable outcome where no player benefits by changing their
strategy.
- **Prisoner's Dilemma**: A game theory model showing individuals acting in self-interest
lead to suboptimal outcomes.
- **Behavioral Social Preferences**: People’s decisions are influenced by social factors like
fairness, reciprocity, and altruism.
- **Ultimatum Game**: People reject unfair offers even if it means receiving nothing.
- **Dictator Game**: Proposers still often offer a portion of money, showing altruism.

Chapter 3: Theories of Institutional Change

3.1 Spontaneous Institutional Change

- **Definition**: Institutions evolve naturally over time due to social, economic, and cultural
influences.
- **Path Dependency**: Past decisions limit future options, causing institutional inertia.
- **Cultural and Social Evolution**: Institutions change spontaneously as societies adapt to
new challenges.
- Examples: Emergence of property rights, informal markets, or bartering systems.

3.2 Institutional Change as Designed

- **Definition**: Institutional changes are consciously planned and implemented by


policymakers to achieve specific goals.
- Examples: Creation of formal legal systems, market liberalization, and governance
reforms.

**3.2.1 The Efficiency View**: Institutional change to address economic inefficiencies and
promote welfare.
- **Douglass North**: Institutions reduce transaction costs and uncertainty in economic
exchanges.
- **Ronald Coase**: Institutions address transaction costs.
- Examples: Development of formal property rights, creation of central banks.

**3.2.2 The Power (Distributive) Perspective**: Change is driven by power struggles and
the interests of dominant groups.
- **Political Economy**: Institutional changes reflect the interests of elites.
- **Distributive Politics**: Changes often benefit certain groups, leading to inequality.
- Examples: Land reforms, trade agreements favoring rich nations.

You might also like