Thoth distribution@thoth.pub 20260428T183642

urn:uuid:db44931b-8fa2-4d80-8e17-851bf26629c8 03 01 01 urn:uuid:db44931b-8fa2-4d80-8e17-851bf26629c8 15 9781805116233 06 10.11647/OBP.0466 00 EB E107 10 Creative Commons License 02 https://creativecommons.org/licenses/by-nc/4.0/ 01 01 Allocation, Distribution, and Policy Notes, Problems, and Solutions in Microeconomics 1 A01 21 0000-0001-6068-4430 Samuel Bowles 2 A01 21 0000-0002-8891-6843 Weikai Chen First edition. 01 eng 00 270 03 10 BUS021000 B2 Economics 93 KC 10 BUS044000 93 KCA B2 Politics and Sociology 10 BUS022000 93 KCH 10 BUS051000 93 KCVG 10 BUS068000 93 GTP 10 BUS099000 01 06 03 00 Microeconomics has been transformed in recent decades by the increasing use of game theory, behavioral economics, evolutionary modeling, network economics, mechanism design and attention to limited competition and asymmetric information. Bowles and Chen provide problem sets and exam questions (with carefully explained solutions) based on the new microeconomics, engaging learners with applications to income distribution, limited competition in goods and labor markets, climate change, and other public policy topics.Background notes explain the underlying concepts, their origin in the thinking of the great economists of the past, applications to macroeconomics, and relevant empirical evidence.This work provides a problem-based and policy oriented approach to teaching microeconomics, development, labor, environment, public economics and topics in business, management and public policy to upper level undergraduates, masters and doctoral students. 04 00 Preface vi 1 Introduction: Doing Post-Walrasian Microeconomics 1 1.1 “If you are not doing something, you are not learning anything” . . . . . . . . . . . . . . . . 1 1.2 Post-Walrasian microeconomics: A new set of benchmark models . . . . . . . . . . . . . . . 2 1.3 What should economics be about? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.4 By necessity, post-Walrasian microeconomics is dynamic, multi-disciplinary, and pluralist . 6 2 Strategic Interactions 8 2.1 The language of game theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.2 Risk dominance in the Plant or Steal Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.3 Monitoring, working, and mixed strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.4 Nash’s “American Way,” collective action, and alternative equilibrium concepts . . . . . . . 14 2.5 Residential segregation and integration as Nash equilibria . . . . . . . . . . . . . . . . . . . 17 3 Preferences, Beliefs, and Behavior 21 3.1 An offer you can refuse: Inequality aversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.2 Reciprocity and Bayesian Nash equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.3 Other-regarding preferences: Altruism and reciprocity . . . . . . . . . . . . . . . . . . . . . 24 3.4 Incentives may crowd out ethical and other-regarding preferences . . . . . . . . . . . . . . . 26 3.5 Inferring control-averse preferences from experiments . . . . . . . . . . . . . . . . . . . . . 29 4 Public Goods, Mechanism Design, and the Social Multiplier 31 4.1 The social multiplier of a tax on cigarettes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.2 Public goods and common property resources . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.3 Private under-provision of a public good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.4 An optimal subsidy for public goods provision . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.5 Conflict over who will produce a household public good . . . . . . . . . . . . . . . . . . . . 43 4.6 Teamwork and optimal contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5 Coordination Failures: A Taxonomy 49 5.1 The tragedy of fishers: A common property resource coordination failure . . . . . . . . . . 49 5.2 Footloose jobs and fiscal competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 5.3 Conspicuous consumption as a “public bad” . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 5.4 Residential segregation as a coordination failure . . . . . . . . . . . . . . . . . . . . . . . . . 67 5.5 Interdependence and coordination: A taxonomy . . . . . . . . . . . . . . . . . . . . . . . . . 70 6 Environmental Coordination Failures and Institutional Responses 76 6.1 The Tragedy of the Fishers revisited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 6.2 Averting the tragedy: Privatization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 6.3 Averting the tragedy: Optimal taxes and government regulation . . . . . . . . . . . . . . . . 82 6.4 Averting the tragedy: Civil society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 6.5 Disrupting a carbon trap to promote electronic vehicle adoption . . . . . . . . . . . . . . . . 87 7 Bargaining: Mutual Gains and Conflicts over their Distribution 91 7.1 Deadheads vs. nerds: Coasean bargaining and state intervention as complements . . . . . . 92 7.2 Bargaining power in the Nash solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 7.3 Investing in bargaining power with transaction-specific assets . . . . . . . . . . . . . . . . . 99 7.4 The war of attrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 8 Principals and Agents: Contracts, Norms, and Power 104 8.1 An incomplete contract: Difficult-to-measure quality . . . . . . . . . . . . . . . . . . . . . . 104 8.2 Renter as agent, landlord as principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 8.3 Quality control: The Benetton model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 8.4 Rental of capital goods as a principal agent problem . . . . . . . . . . . . . . . . . . . . . . . 112 9 Economic Classes and Incomplete Contracts 116 9.1 Sharecropping and incomplete labor contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 117 9.2 Class conflict and the choice of contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 9.3 Constrained choice under contrasting contracts . . . . . . . . . . . . . . . . . . . . . . . . . 128 10 Work and Wages 133 10.1 A Walrasian labor market equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 10.2 Employment and labor discipline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 10.3 Employment and labor discipline: Applications . . . . . . . . . . . . . . . . . . . . . . . . . 140 10.4 Fair wages: Inequality-averse norms and best responses . . . . . . . . . . . . . . . . . . . . . 144 10.5 Endogenous technology and workplace amenities with incomplete contracts . . . . . . . . . 146 10.6 Buy this job: Can rent-seeking employers clear the labor market? . . . . . . . . . . . . . . . 149 10.7 The no-shirking condition and choice of technique: Efficiency vs. control . . . . . . . . . . . 151 11 Credit Markets and Wealth Constraints 154 11.1 Robinson Crusoe and the Walrasian credit market . . . . . . . . . . . . . . . . . . . . . . . . 155 11.2 Wealth matters in credit markets: Excluded and quantity-constrained borrowers . . . . . . . 157 11.3 Pareto-improving egalitarian redistribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 11.4 Repeated interactions in the credit market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 11.5 An alternative (no-shirking type) principal-agent model of the credit market . . . . . . . . . 166 11.6 When does titling the wealth of the poor not help them? The de Soto effect . . . . . . . . . . 169 11.7 Wealth constraints: Why the poor face a limited set of contractual opportunities . . . . . . . 172 12 Risk and Inequality: Redistribution as Insurance 177 12.1 Taking risks: Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 12.2 Free tuition: Can it be fair to those who will not continue their education? . . . . . . . . . . 179 12.3 Is equality the enemy of innovation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 13 Inequality: Institutions, Market Structure, and Policy 186 13.1 A summary of economic differences among people: The Gini coefficient . . . . . . . . . . . 188 13.2 Inequality and average income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 13.3 Network structure, bargaining, and inequality . . . . . . . . . . . . . . . . . . . . . . . . . . 195 13.4 Product market structure and the distribution of income . . . . . . . . . . . . . . . . . . . . 199 13.5 Experimenting with history: Market structure, the wage curve, and rising inequality in the U.S. 201 13.6 Monopsony and the minimum wage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 13.7 A rent-seeking state: Politics as who gets what, when, and how . . . . . . . . . . . . . . . . . . 207 14 Endogenous Preferences: The Evolution of Cooperation 211 14.1 Conformist learning and altruistic preferences . . . . . . . . . . . . . . . . . . . . . . . . . . 212 14.2 The evolution of cooperation: Repeated interactions, segmentation, and punishment of free riders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 14.3 Learning, imitation, and segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 14.4 Community, cooperation, and the gains from trade . . . . . . . . . . . . . . . . . . . . . . . 222 15 The Evolution of Conflict over the Distribution of Gains from Cooperation 227 15.1 Conspiracy of doves, bourgeois invasion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 15.2 Conformist Hawks and Doves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 15.3 Risk dominance and evolutionary stable distributional conventions . . . . . . . . . . . . . . 234 15.4 Lords and Merchants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 15.5 Collective action: Payoffs and conformism . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 16 Projects: From Learning Economics to Doing Economics 242 16.1 An employment subsidy (or wage subsidy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 16.2 The private exercise of power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 16.3 Domestic “labor discipline”: Can the principal agent model be “exported”? . . . . . . . . . 243 16.4 The BIG idea: An incentive-compatible revenue-neutral guaranteed income . . . . . . . . . 244 16.5 The dual economy and history’s hockey sticks . . . . . . . . . . . . . . . . . . . . . . . . . . 245 16.6 After NAFTA: The distribution of the gains from trade in a dual economy . . . . . . . . . . 248 16.7 Apartheid because of or in spite of capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . 248 16.8 How gig work will affect the whole economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 16.9 The whole economy effect of AI and robotics . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 Bibliography 250 Glossary 256 Index 261 20 00 Open Access Open Book Publishers 01 Open Book Publishers Cambridge, UK 04 01 20251104 2025 06 15 9781805116226 06 15 9781805116233 09 Open Book Publishers 02 Publisher's website: web shop https://www.openbookpublishers.com/books/10.11647/OBP.0466 99 01 09 Open Book Publishers 29 Publisher's website: download the title https://books.openbookpublishers.com/10.11647/obp.0466.pdf 99 01