Overview for exam

Institutional Economics and Economic Organization Theory (IE&EOT)

19 April 2012

The field of IE&EOT

Values

Norms

Formal institutions Informal institutions

Governance structures

The field of IE&EOT

• Four approaches:Static approach Dynamic approach

Efficiency 1. Treats the Institutional environment as given

2. What is the optimal / most efficient governance structure?

1. Deals with institutional change

2. How do institutions change if actors have an efficiency perspective?

Vested interest 1. Treats the Institutional environment as given

2. Governance structures are explained as the result of power play andthe protection of vested interests

1. Deals with institutional change

2. How do institutions change when vested interests are taken into account?

What are the main sources of information for review?

• Textbook

• Power Point Presentations from Lectures

• Class Notes

• Practicals:

• Background Readings

• Q&A

About the Exam

• What are you allowed to bring to the exam?

• Calculator (but not the scientific type)

• Dictionary (clean)

• What is NOT allowed:

• Mobile phone

• Any course materials

• Exam format:

• REMARK: the example of a previous exam that you can find under ‘course information’ uses the old exam format (6 questions)

• 4 questions (divided in sub-questions) – 2 questions chosen by each of the lecturers

• One answer sheet per question

Types of Exam Questions

• 1. Short responses with definitions

• 2. Problem solving with calculations

• 3. Applied thinking to a scenario

• 4. Applied thinking to a short text (similar to assignments)

Short responses with definitions

• Institutions

a. What does the term ‘institutional environment’ mean?

b. What are governance structures?

c. What are the two polar cases of the spectrum of governance structures?

d. Which are the three main types of governance structures? Please give an example of each.

Problem solving with calculations

Consider a firm that employs two types of workers. The expected

output that each worker type can achieve (depending on their effort

level) is given in the table below. Both workers are rewarded 1 € per

kg output produced (i.e. if a worker produces 500 kg, the payment will

be 500 €).

•Verify if the incentive compatibility constraint is satisfied for worker 1.

•Verify if the incentive compatibility constraint is satisfied for worker 2

Worker 1 Worker 2Output (in kg) Output (in kg)

Effort: No effort Effort = 250 € No effort Effort = 250 €Probability:0.1 500 100 1000 3000.3 300 300 500 5000.6 100 500 300 1000

Applied thinking to a scenario

• Assume a lake that is a popular spot for sports fishers in

summer. The local authority has recently approved the

establishment of a fish farm in the middle of the lake. The

sports fishers stay on shore so the fish farm does not prevent

them from continuing their activities. However, after a while it

becomes clear that the waste of the fish farm is negatively

affecting the habitat of the native lake fish species and their

numbers are deteriorating.

• Given your knowledge of the Coase Theorem (and assuming that

the assumptions of the Theorem hold), what would you suggest to

the local authority to solve this problem. Use the specifics of the

example in your answer.

Applied thinking to a short text

• Very similar to the format of the weekly assignments

• A 1-2 page background reading will be provided

• You will be asked to apply your knowledge gained in the course

through a number of short questions related to the background

reading

Student evaluations

• Invitations to fill out the course evaluations will be in your mailbox today.

• This is your opportunity to signal what you like or don’t like about this course.

• Please fill in the evaluation. We value your opinion.

Questions?