ADEclass5_10-11 - ORGANIZATIONAL ECONOMICS 2010-2011 Pablo...

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Unformatted text preview: ORGANIZATIONAL ECONOMICS 2010-2011 Pablo Ruiz Verdú Session #5 Outline: Problem set 1, parts 2 and 3: Efficiency No wealth effects The Value Maximization Principle The Coase Theorem Examples and discussion Remember to form group and choose segment! deadline postponed until Thursday (72) / Wednesday (70). For next session: Review test: Readings: M&R, 19-28 & 35-48. Problem set 1, parts 1, 2 & 3. Microhoo case No wealth effects Suppose that several individuals have to make an organizational decision. If the decision made by the individuals depends on the initial distribution of wealth (wealth matters when making the decision) wealth effects Decision does not depend on their wealth no wealth effects . No wealth effects ≠ individuals do not value money No wealth effects = the money the individuals initially have does not affect the decisions they make. For there not to be wealth effects, three conditions must hold. 1) Our definition of no wealth effects consists of three conditions. a) Give an example of a case in which condition 2 is likely to hold and another example in which condition 2 is not likely to hold. No wealth effects Wealth effects: There are no wealth effects in a given organizational problem if: 1. “There is a price for everything”: For each individual and any two alternative decisions x and y such that the individual prefers x to y, there is a definite amount of money that would be sufficient to compensate the individual for switching from x to y . 2. The amount of money needed to compensate an individual for switching from x to y does not depend on the individual’s initial wealth. 3. For any individual and any two alternatives x and y such that the individual prefers x to y , it must be possible for that individual to pay others to compensate them (if necessary) for a switch from y to x . 1) Our definition of no wealth effects consists of three conditions. a) Give an example of a case in which condition 2 is likely to hold and another example in which condition 2 is not likely to hold. Consider the owners of a corporation. If they become wealthier would that affect the decisions of the firm they own? In general, we expect owners to have the corporation maximize profits, independently of their personal wealth condition 2 may hold (at least as an approximation) for decisions that involve firms. How much would I have to pay you to convince you to have class on Saturdays at 7am? You may accept, say, 100 per month if you are a starving student You may demand something like 1,000 euros if you are wealthy For many decisions, we expect individuals’ decisions to depend on their wealth However, for levels of wealth that are similar, decisions will likely be approximately the same in cases where decisions do not involve large wealth changes, condition 2 may be approximately correct. No wealth effects Note that 1 implicitly implies that the individuals value money....
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ADEclass5_10-11 - ORGANIZATIONAL ECONOMICS 2010-2011 Pablo...

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