Theorie Klausuren und PS

A target refers to an assigned value of an economic variable that is intended to be achieved. This can include prices, price indices, rates of change, quantities, or any other relevant economic measure. Targets can be set based on their intrinsic value or because they impact other variables or principles such as distribution and fairness.

Instruments, on the other hand, are variables that policymakers can directly or indirectly influence to achieve the desired targets, such as investments in education or research and development subsidies.

“Golden Rule“: Policymakers must have at least as many independent policy instruments as there are independent policy targets. Golden Rule implies that number of targets and number of instruments should be equal.

• in most cases number of targets > number of instruments (Golden Rule likely to be violated)

• the higher the number of targets, the higher the probability that they are inconsistent

• instruments often do not influence just one target, they have often influence on other targets, too.

Unanimity Rule

Summarized:

Under the unanimity rule, a policy can only be approved if every single voter supports it, giving each individual veto power. This rule ensures that no individual or minority is exploited. Unanimity is chosen at the "constitutional stage" when individuals decide on basic rules without knowledge of their future preferences or situation. This hypothetical stage considers unanimity as optimal, as it guarantees Pareto efficiency.

 Difficulties and problems in practice at the “operational stage”:

• Difficult to realize in large groups (costly in terms of time, negotiations).

• Individual participants can block decisions (crucial role of participants’ bargaining power).

• Incentives for strategic behavior under asymmetric information.

• Nevertheless, unanimity rule is an important benchmark for evaluating outcomes of decision processes.

Majority Rule

Summarized

The costs of decision-making vary based on the complexity of the issue and the number of people involved. There is no one-size-fits-all optimal majority rule. Important issues may need a higher majority (supermajority), while less critical ones may require a lower majority (submajority). Indirect democracy is seen as an improvement as it allows for flexibility in decision-making based on the importance of the issue. The expected value of such disadvantages/ disutility of collective decisions obviously depend on the size of the quorum and are labeled external costs (EC). The lower 𝑞𝑞, the higher the external costs of the quorum. The highest external costs are caused by dictatorship; they are zero for unanimityThe higher the quorum, the higher the cost of negotiations and finding a compromise to achieve the higher quorum (investment of more time and effort). These cost are labeled decision costs (DC). Therefore, there is a trade-off between external and decision costs.

Problems:

• Exploitation of the minority

• Logrolling

• Cycling

• Agenda setting and manipulation

Individuals have an incentive to strategize and form coalitions (majorities) to their advantage, anticipating the possibility of being exploited by other majorities. For example, Group A may support a decision important to Group B in exchange for support from Group B on a different decision important to Group A. This process, known as logrolling, can lead to both efficient and inefficient outcomes, depending on individual preferences and the feasibility of creating credible coalitions.

The Phillips curve describes a previous theory about the inverse relationship between inflation and unemployment. Nowadays, it is less reliable.

Monetary policy instruments used to influence the inflation rate are:

1. Interest rates - Increasing dampens, decreasing stimulates inflation.

2. Open market operations - Buying increases, selling decreases inflation.

3. Reserve requirements - Increasing reduces inflation.

4. Currency interventions - Depreciation increases, appreciation dampens inflation.

5. Forward guidance - Communicating plans influences inflation expectations

Interest groups invest resources and efforts to influence politicians in order to implement policies that benefit them, resulting in rents. However, part of these rents are spent by interest groups, reducing overall net benefits. This process of influencing policy through resource expenditure is known as lobbying. If the expenditures are redistributed to politicians, there are no additional costs for society. However, "unproductive" expenditures increase the social loss beyond the initial costs (L), considering the opportunity costs of such expenditures. Instead corruption is illegal.

Yes, lobbying can bring advantages such as representation of interests, exchange of information, promotion of expertise, and creating a counterbalance to government power. However, transparent and well-regulated lobbying is essential to limit potential disadvantages.

In democracies, there is typically a clear separation of powers between the legislative, executive, and judicial branches. The responsibility for policy implementation is often delegated to government agencies or bureaucracy. Governments frequently entrust decision-making power to bureaucrats in areas such as monetary policy and competition policy. As a result, numerous specialized agencies exist, often with overlapping and conflicting responsibilities. It is important to note that bureaucrats themselves can function as interest groups and act in their own self-interest, which may impact policy outcomes.

Principal-Agent relationship:

• Asymmetric information; bureaus are specialized and “experts” in ministries and other bureaucracies have informational advantages about the effects and costs of policies.

• Cost functions of bureaucracies are hard to observe.

• Output is hard to measure; in many cases, this leads to input control.

• Often non-market goods (e.g., national defense) are produced that have no market price.

• There is no competitor and bureaucrats are often monopolists in production of their services.

• Efficiency is hard to measure.

• Bureaucrats cannot be controlled completely.

• Therefore, bureaucrats have the opportunity to follow and realize their own interest.

In this context, "rent" refers to the additional income or profit that a lobbyist can potentially gain by influencing a policy or decision in favor of their client.

For a risk-averse lobbyist, who is cautious about taking risks and prefers more predictable outcomes, uncertainty about the size of rent can lead to the following effects on lobbying expenditures:

1. Increased Caution: When there is uncertainty about the potential gains from lobbying efforts, risk-averse lobbyists may become more cautious and hesitant to invest heavily in lobbying.

2. Focus on Assured Gains: Risk-averse lobbyists might prioritize lobbying efforts where the potential rent is more certain or where they have a higher likelihood of success.

3. Resource Diversification: To mitigate the risk associated with uncertain rent sizes, lobbyists may diversify their efforts across various issues or clients.

4. Seek Long-Term Relationships: Risk-averse lobbyists might prefer to establish long-term relationships with clients to ensure a steady stream of income.

5. Information Gathering: Uncertainty often arises due to a lack of information about future outcomes. Risk-averse lobbyists may invest more in gathering data and conducting research to reduce uncertainty and make more informed decisions about their lobbying strategies.

In summary, uncertainty about the size of rent can lead risk-averse lobbyists to adjust their lobbying expenditures by becoming more cautious, focusing on assured gains, diversifying their efforts, seeking long-term relationships, and investing in information gathering to make more informed choices

Politicians have several instruments at their disposal to incentivize bureaucrats to employ an optimal amount of effort and deter them from shirking. These instruments are often part of the broader framework of public administration and performance management. Some of these instruments include:

1. Performance-Based Incentives: Providing performance-based rewards, such as bonuses, promotions, or salary increases, can motivate bureaucrats to exert more effort and perform better in their roles.

2. Performance Evaluation: Regular performance evaluations allow politicians to assess the bureaucrats' work and provide feedback on their performance. Constructive feedback can encourage improved effort and discourage shirking.

3. Transparency and Accountability: Implementing transparency measures in the bureaucracy ensures that actions and decisions are open to public scrutiny. This can create a sense of accountability and encourage bureaucrats to avoid shirking behaviors.

4. Clear Goals and Targets: Setting clear and achievable goals and targets for bureaucrats can help them focus their efforts and understand what is expected of them.

5. Training and Skill Development: Investing in training and skill development for bureaucrats can enhance their capabilities and job satisfaction, leading to increased effort and reduced shirking.

6. Job Security and Tenure: Providing bureaucrats with job security and tenure can reduce the fear of arbitrary dismissal and encourage a stable, long-term commitment to their responsibilities.

The probability of detecting the bureaucrat's shirking behavior can significantly affect the use and effectiveness of these instruments. When the probability of detection is low:

1. The effectiveness of performance-based incentives diminishes since bureaucrats may believe that their shirking behavior is less likely to be discovered, reducing the incentive to work harder.

2. Performance evaluations may have less impact on behavior if bureaucrats feel that the chances of being caught shirking are low.

3. Transparency and accountability measures may not be as effective in deterring shirking if the risk of getting caught is low, as bureaucrats may feel they can avoid scrutiny.

4. Clear goals and targets may not be as motivating if the perceived likelihood of facing consequences for not meeting them is low.

On the other hand, when the probability of detecting shirking behavior is high:

1. Performance-based incentives become more effective since the risk of being penalized for shirking is higher.

2. Performance evaluations carry more weight, as they can lead to concrete consequences for bureaucrats.

3. Transparency and accountability measures become stronger deterrents, as the chances of facing public scrutiny and criticism increase.

In conclusion, the probability of detecting shirking behavior plays a crucial role in shaping the effectiveness of the instruments used by politicians to incentivize bureaucrats to exert optimal effort and discourage shirking. Higher detection probabilities generally strengthen the impact of these instruments, while lower probabilities may weaken their effectiveness.

Monetary policy refers to the actions taken by a country's central bank to manage the money supply, interest rates, and credit conditions in the economy to achieve certain macroeconomic objectives. The short-term and long-term impacts of monetary policy can vary, and they can affect different aspects of the economy.

Short-term impacts of monetary policy:

1. Interest Rates: In the short term, changes in monetary policy can lead to adjustments in short-term interest rates. If the central bank lowers interest rates, it aims to stimulate borrowing and spending by making credit cheaper. Conversely, raising interest rates can reduce borrowing and spending to curb inflation.

2. Consumer Spending: Lower interest rates can encourage consumers to borrow and spend more on big-ticket items like homes and cars. This increased spending can lead to a short-term boost in consumption and economic activity.

3. Investment: Lower interest rates can also incentivize businesses to invest in new projects and expansions. Increased business investment can spur economic growth and job creation.

4. Exchange Rates: Changes in interest rates can influence exchange rates, affecting the competitiveness of a country's exports and imports in international markets.

Long-term impacts of monetary policy:

1. Inflation: Over the long term, the impact of monetary policy on inflation becomes evident. If the central bank pursues an expansionary monetary policy for an extended period, it may lead to higher inflation rates.

2. Economic Growth: The effectiveness of monetary policy in stimulating economic growth in the long run depends on various factors, including the overall health of the economy, productivity, and structural reforms.

3. Asset Prices: Prolonged periods of low interest rates and easy credit conditions can contribute to asset price inflation, leading to potential bubbles in the housing or stock market.

4. Financial Stability: The long-term effects of monetary policy on financial stability are critical. Excessive credit growth and risk-taking, driven by loose monetary policy, can increase the vulnerability of the financial system to crises.

5. Exchange Rates and Trade Balance: Persistent monetary policy measures can impact the exchange rate in the long run, which, in turn, influences a country's trade balance and competitiveness.

It's essential to recognize that the transmission and effectiveness of monetary policy can vary based on the broader economic context, fiscal policy, global economic conditions, and other external factors. Additionally, the long-term impacts of monetary policy can be subject to lags, making it challenging to predict and manage the economy with precision. As a result, policymakers need to consider both short-term and long-term effects when implementing monetary policy to ensure stable and sustainable economic growth

Lucas' critique questioned the assumption made in traditional econometric models that the economy's parameters remain fixed when policy changes are implemented. In reality, if individuals optimize their behavior, these parameters are likely to change in response to expected policy changes. This means that economic policy cannot be viewed simply as a matter of estimating parameters and predicting outcomes, but rather as a complex process involving strategic interactions between policymakers and the private sector.

—> this interaction between government and private sector can be understood as a “policy game” in a game theoretic set-up