Eric Rasmusen’s Weblog

There are lots of these “efficiency wage” models (beyond, of course, where the agent has some market power, so he bargains for a higher wage with the principal). Here are some:

1. Moral hazard. The agent must be given an inducement for high effort. If he is paid a high wage, on the threat of losing his job and future wages if he is caught shirking (whether with certainty or by auditing), he will work hard now even if his current wage cannot be conditioned on his effort. (more…)

How does one model a situation in which the agent is unsure about the principal’s beliefs about the agent’s ability? I just made up some notes on “Beliefs about Beliefs” for G601 on how to do this in the standard Harsanyi framework.

Here are some notes on expected utility theory that I wrote up after a stimulating lunch. Suppose Jack might earn $100, $200, $300, or $400, with equal probabilities, an expected wealth of $250. His information partition is (100,200,300,400)– he can’t rule out anything.

Jack is very risk averse, so his utilities from known wealths are

U(100) = 0 - e
U(200) = 100 - e
U(300) = 120 - e
U(400) = 128 - e, (more…)

Eugene Volokh had a post today on whether something can be “nearly infinite”. I think it can— but only if it actually is infinite. First, here’s what he says: (more…)

Here is an example of a cost equation such that the average cost is first falling and then constant. It would not be hard to have the marginal cost start rising again at some greater output level, in which case the average cost would start rising too, giving us a U-shaped cost curve with a flat bottom for the U, an entire range of efficient firm sizes.

Claim on public TV show attacking capitalism: Wal-Mart has bigger
markups on the prdoucts it imports from China.

True or false?

(more…)

This post is notes mainly for myself (or for others who have heard about this subject) on risk. I’ve started reading Roger Lowenstein’s When Genius Failed, about the collapse of Long-Term Capital Management in 1998. Besides the lessons for finance, thinking, and life generally, Professors Merton and Scholes were involved. On page 62 Lowenstein talks about risk, and that started me thinking.

(more…)