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33 Cards in this Set
- Front
- Back
Institution |
The constraints placed by law and social norms on human behavior |
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Transaction Costs |
The costs associated to simple transactions such as buying or selling merchandise, borrowing money, or investing in a business |
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Formal Institutions |
Institutions that are codified rules (in writing) |
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Political Institutions |
The set of rules that define the powers of the major political bodies and players, and how they are selected (define democracy or dictatorship) |
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Legal Institutions |
Non-political codified laws |
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Common-law System |
Law system based on legal precedents |
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Civil-law systems |
Law systems that rely mostly on recorded legal statutes |
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Informal Institutions |
Institutions that are not legally codified |
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What are the 5 institutional problems? |
Informational Problem, Hold-Up Problem, Commitment Problem, Cooperation Problem, and Coordination Problem |
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Asymmetrical information (Informational Problem) |
When one party has more information about the product/service/land than the other party |
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Adverse Selection (Informational Problem) |
A situation caused by informational asymmetries in which reputable lenders and sellers leave the market to disreputable players, resulting in a possible market collapse |
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Moral Hazard |
The possibility of unobservable actions one of the contracting parties can take that will hurt the interest of the other contracting party |
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What are some formal institutional solutions to informational problems? |
Disclosure rules, regulation of access or entry into a profession, warranty, return policies, and signaling, informational intermediaries, and rating agencies |
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What are two informal institutional solutions to informational problems? |
Relational contracting and reputation |
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Hold-Up Problem |
A situation in which a business partnership requires an investment from one of the parties that is specific to the transaction in question and, once the investment has been made, the other partner "holds up" the party that made the investment in order to renegotiate the deal |
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What is the formal institutional solution and the informal institutional solution to the hold-up problem? |
Binding and legally enforceable contracts, vertical integration |
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Commitment Problem |
A situation where one party reneges on prior commitments made to another party in the course of joint transactions, specifically during sequential transactions |
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What is the formal institutional solution and the two informal institutional solutions to the commitment problem? |
Contract enforcement, credibility and witnesses to the contract/agreement |
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Cooperation Problem |
A situation where individuals follow their self-interest in making their choices and where the outcomes of these choices are less than optimal for all parties |
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Nash Equilibrium |
A situation in which each agent has chosen an action that is optimal given the action of the other |
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Dominant Strategy |
A situation in which the same action is optimal and independent of what the other player chooses |
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What is a some solutions to the cooperation problem? |
Institutions such as: labor unions, professional organizations, political parties, and international institutions - DEMOCRACY!!! (to help build these associations) |
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Collective-action Problem |
When people fail to undertake collective action even though it is in their joint interest to do so |
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Coordination Problem |
A situation in which agents can all coordinate on a specific action and the action an individual chooses depends on what others do (multiple equilibria) |
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Why is it important to understand coordination problems? |
Because countries coordinate on suboptimal equilibrium - i.e. corruption or low level of law abidance becomes optimal for agents because that is what others are doing |
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What are 2 solutions to coordination problems? |
Formal laws and regulations, social conventions, focal point, and the big push idea: the government or groups of people use a "big push" to get the society to move to the optimal equilibrium |
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Focal Point |
A solution to a coordination problem that most people will find without having to communicate |
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Functionalist Fallacy |
When an object's function is confused with the cause of its existence |
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What are the three types of transactional costs? |
Search and information costs, bargaining costs, and policing and enforcement costs |
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Market-Creating Institutions |
Institutions that protect property rights, ensure that contracts are enforced, minimizing corruption - creates an environment for business; police and enforceable contracts |
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Market-Regulating Institutions |
Institutions that limit monopolies, manage public goods, deal with market failures - regulatory agencies |
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Market-Stabilizing Institutions |
Institutions that ensure low inflation, low macroeconomic volatility - that stabilize economy with policies; independent central banks |
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Market-Legitimizing Institutions |
Institutions that provide social protection and insurance, redistribute, and manage conflict - legitimize marginalized persons; pension systems, unemployment benefits |