Download presentation

Presentation is loading. Please wait.

Published byTalon Randall Modified over 2 years ago

1
1

2
2 Uncertainty Dixit: Optimization in Economic Theory (Chapter 9)

3
3 1,2,3,….,m States of the world p 1, p 2,…..p m probabilities Y 1, Y 2,…..,Y m income in state i F(Y 1, Y 2,…..,Y m, p 1, p 2,…..p m ) - objective function Expected utility, U - von Neumann Morgenstern utility function

4
4 Risk Aversion Y 1, Y 2, p 1, p 2 Expectation of Y: p 1 Y 1 + p 2 Y 2 Y1Y1 Y2Y2

5
5 Insurance Y 1 < Y 2 Premium $1 buys $b compensation in the bad state. $x → $bx Y 1 – x + bx, Y 2 – x

6
6 But: 1 = pb (Competition in the insurance industry) Full Insurance

7
7 Action to reduce the risk (Care) Y 1 < Y 2 Cost z determines p 1 = p(z). p’(z) < 0. + Marginal benefit Marginal cost

8
8 Care & Insurance zero expected profit:

9
9

10
10 r a random variable

11
11 Safe and Risky asset

12
12 OR: interior solution:

13
13 Managerial Incentives Owner hires a Manager for a project Project (if it succeeds) yields V Probability of success is p or q ( p > q ). The manager determines the probability Cost of the higher probability p is e. Manager’s salary is w.

14
14 First Best (the owner can observe the manager’s quality) His expected profit: assume: and: Then Owner can get:

15
15 The owner cannot observe the manager’s quality If the owner pays the manager according to success or failure Pays x if success, and y if failure Incentive for manager Participation constraint indifference

16
16 Owner’s expected payoff: Make x, x-y small

17
17 Owner’s expected payoff: same as First Best

18
18 and owner’s expected payoff:

19
19 owner’s expected payoff: We assumed (high quality worker is better) first best

20
20 Cost-Plus Contracts Quantity produced q at cost c Government pays R >qc A firm with costs c 1 o r c 2 ( > c 1 ) Government knows prob. p 1 p 2 Government chooses R 1 R 2 c 1 c 2

21
21 + +

22
22 +

23
23 End

Similar presentations

OK

Profit Maximization (Cont’d) Renting or buying capital Profit maximization and returns to scale.

Profit Maximization (Cont’d) Renting or buying capital Profit maximization and returns to scale.

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Ppt on id ego superego lord Ppt on network topologies and its types Ppt on applied operational research definition Ppt on question tags quiz Download ppt on mineral and power resources Ppt on conservation of wildlife and natural vegetation killer Ppt on bank lending rate Ppt on object oriented database management system Ppt on time management in marathi Ppt on two point perspective paintings