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PROPERTY AND POWER: Mutual Gains and ConflictBargaining, Institutions and Allocations (Unit 5)
WEEK 1
How institutions (the rules of the game) influence the bargaining power of
economic agents in economic exchanges, and thus how the gains from
exchange are allocated.
- We are interested in the fairness and efficiency of the allocations that result
Technology, biology, economic institutions, and people’s preferences are all important
determinants of economic outcomes.
Power is the ability to do and get the things we want in opposition to the intentions of
others.
Interactions between economic actors can result in mutual gains, but also in conflicts over
how the gains are distributed.
Institutions influence the power and other bargaining advantages of actors.
Two key insights to remember
1. Institutions and the exercise of power are critical in how the gains are distributed
eg. Consumer protection act – legal recourse if the car is faulty
Bargaining over wages and labour market institutions
2. In economic interactions when there are mutual gains possible there must be
conflicts over how these mutual gains will be distributed.
eg. If you are selling your car, you will want to get as much for it as you possibly can
whereas the potential buyer will try get you to lower your price. This is a conflict –
the more I get, the less the buyer gets, the more the buyer gets, the less I get.
Institutions = Rules of the game
Rules of the game affect:
- How the game is played
- The size of the total payoff available to those participating
- How this total is divided
Changing the rules of the game changes the outcome
,When there are 2 responders in the ultimatum game, they are more likely to accept lower
offers because each is not sure what the other will do. This means the proposer can make a
lower offer and obtain a higher payoff
Institutions and Power
INSTITUTIONS
Institutions
Institutions are the written and unwritten rules that govern :
- What people do when they interact in joint project
- The distribution of the economic rents of their joint effort
Since institutions determine who can do what, and how payoffs are distributed, they
determine the power individuals have to get what they want in interactions with others.
Institutions are closely related to power and give:
• The ability to set the terms of an exchange (eg. wage)
• Impose penalty
In terms of the job market,
Institutions can determine your :
- Wage
- How many hours you work
- Holiday
- Bonus
- Promotion
- Dismissal
- Who cleans the communal kitchen
- Participation in work social event
, Institutions and Power
POWER
Power
Power is the ability to do and get the things we want in opposition to the intentions of
others
It takes two forms:
• It may set the terms of an exchange: By making a take-it-or-leave-it offer (the ultimatum
game)
• It may impose or threaten to impose heavy costs: Unless the other party acts in a way that
benefits the person with power
Bargaining power: The extent of a persons advantage in securing a larger share of the
economic rents made possible by an interaction
The rules of the ultimatum game determine the ability that the players have to obtain a high
payoff— the extent of their advantage when choosing an allocation—which is a form of
power called bargaining power.
The power to make a take-it-or-leave-it offer gives the Proposer more bargaining power
than the Responder, and usually results in the Proposer getting more than half of the
allocation. Still, the Proposer’s bargaining power is limited because the Responder has the
power to refuse. If there are two Responders, the power to refuse is weaker, so the
Proposer’s bargaining power is increased.
In experiments the assignment of the role Proposer or Responder, and hence the
assignment of bargaining power, is usually done by chance. In real economies, the
assignment of power is definitely not random.
In the labour market, the power to set the terms of the exchange typically lies with those
who own the factory or business: they are the ones proposing the wage and other terms of
employment. Those seeking employment are like Responders, and since usually more than
one person is applying for the same job, their bargaining power may be low, just as in the
ultimatum game with more than one Responder. Also, because the place of employment is
the employer’s private property, the employer may be able to exclude the worker by firing
her unless her work is up to the specifications of the employer.
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