Tài liệu Microeconomics for MBAs 57 pdf

At the same time, tenure is part of a mutually beneficial trade between new professors and their universities, primarily because it is a feature of the employment contract that new self-

• As the diversity within a decision-making unit increases (more disciplines

included with more divergent views on how analyses should be organized and

pursued), the demand for tenure will increase

• Should universities become more constrained in their capacities to fund

established faculty positions, tenure may be perceived as even more valuable

Financial exigencies can translate into the loss of faculty positions (with

non-tenured positions becoming prime targets), so it should not be surprising that

faculty will seek with greater diligence to redistribute remaining positions and

rents It also means universities will probably have to spend considerable

resources seeking to instill academic values not the least of which will be the

pursuit of honest dealings and academic excellence This emphasis may cause

faculty members to shun an important incentive inherent in the political process

(especially in large group settings), that is, the tendency to pursue strictly private

objectives at the expense of larger university goals.11

Why Business People Don’t Have Tenure

If professors have tenure, why don’t business people have provision for the same kind of job security? The quick answer to that question is that businesses, unlike universities,

typically are not labor managed (Those that are like universities should be expected to

use some form of tenure.) As noted, in business, goals are usually well defined Perhaps

more importantly, success can usually be identified with relative ease by using an

agreed-upon measure, that is, profit (or the expected profit stream captured in the market prices of traded securities) The owners, who are residual claimants, have an interest in

maintaining the firm’s focus on profits Moreover, people who work for businesses tend

to have a stake in honest evaluations of potential employees, given that their decisions on

“better” recruits can increase the firm’s profits and the incomes and job security of all

parties

Admittedly, real-world businesses do not always adhere to the process as

described They use, to a greater or lesser degree, participatory forms of management,

and for some businesses, profit is not always the sole or highest priority goal “Office

politics” is a nontrivial concern in many firms The point is, however, that in business

there is not as great a need for tenure as exists within academe; employees in businesses

do not have the incentive to demand tenure that professors have, primarily because these employees do not experience the problems inherent in democratic management that

derive from imprecise and shifting goals and from esoteric and ill-defined research

projects Tenure is seldom found in firms, for the simple reason that in business,

employers and employees cannot make mutually beneficial trades (similar to those made

in tenure arrangements)

Now, let’s suppose that political institutions and problems were as well

entrenched in a firm as they are in academe, to the point of significantly undercutting

11

As Miller (1992) has shown, the benefits of “corporate organization” eventually break down when the parties follow completely rational, individualistic precepts [Gary J Miller, Managerial Dilemmas: The

Political Economy of Hierarchy (New York: Cambridge University Press, 1992)]

firm profits What would happen? Clearly, some smart coalition of managers or outside investors would see a potential for increasing their wealth They would buy the firm’s stock at a low price depressed by the political encumbrances and reform management practices, suppressing the power of destructive politics and refocusing the managers’ and workers’ attention on the bottom line They would clarify the extent to which the

workers’ long-run gains would be a function of their contributions to profits The price

of the stock could then rise Voila! The takeover investors would have a wealth increase, and the workers would have less need for tenure, as professors know that form of job protection

Tenure as a Tournament

We also suggest that the granting of tenure can be seen as another form of the

tournament we have discussed earlier in other contexts Tenure decisions are a way of

allowing faculty members to reveal their skills An employer cannot depend on a

potential employee to be fully objective or honest in presenting his or her qualifications The graduate school records of new doctorates provide useful information on which to base judgments of potential recruits for success as university teachers and researchers However, such records are of limited worth in instances where a professor’s research is

at the frontier of knowledge in his or her discipline The correlation between a person’s performance as a student, as a prospective professor, as a teacher, and as a researcher is,

at best, imperfect

In order to induce promising faculty members to accurately assess their abilities and to confess their limits, the competitors (new assistant professors) are effectively told that only some among them will be promoted and retained Since standards for tenure differ from one university to another, universities offer prospective faculty members an opportunity to, in effect, self-select and go to a university where they think they are likely to make the tenure grade The prospects of being denied tenure will cause many (but certainly not all) weak candidates to avoid universities with tough tenure standards, given the probability that they would have to accept wages well below market during the probation period The lost wages amount to an investment that probably will not be repaid with interest (in terms of wages above the market after the probation period when tenure is acquired) Thus, the tenure tournaments can reduce to some extent the costs universities incur in gathering information and making decisions, because they force

recruits to be somewhat more honest in their claims

Competition for the limited number of “prized positions” often will drive new faculty members to exert a level of effort and produce a level of output that exceeds the value of their current compensation To induce prospective faculty to exert the amount

of effort necessary to be ability revealing, universities must offer a “prize” that potential recruits consider worth the effort That is, the recruits must expect the future

(discounted) reward to compensate them for the extra effort they expend in the

tournament and for the risk associated with not “winning.” One approach universities can use to encourage recruits to exert a reasonable level of effort in the competition is to offer those who win the prospect of substantially greater compensation in the future (at least enough to repay the costs of assumed risk and of interest lost on delayed

compensation) Another approach that offers future compensation as an incentive is to

increase the security of continued employment and compensation once the tournament

has ended and the winners have been determined That is, tenure can be offered as the

“prize.”

In the absence of tenure (or some similar device), universities would find it

difficult to make a credible commitment that prospective recruits, who make the

necessary competitive investment during the probationary period by accepting

below-market wages for above-below-market effort, will receive an income stream that compensates

them for all costs, including the required risks We have stressed the instability inherent

in academic democracies that, by its nature, reduces the credibility of virtually every

commitment universities might want to make at employment time Tenure is a practical

means universities use to provide a reasonable level of job security to make a credible

commitment that is, to overcome institutional instabilities and thereby enable them to

pick the “best” professors for continued employment At the same time, tenure is part of

a mutually beneficial trade between new professors and their universities, primarily

because it is a feature of the employment contract that new self-selected faculty members will demand before they agree to participate actively and honestly (in the sense that they

will reveal the limits of their true abilities) in what amounts to a risky and underpaid

employment tournament, albeit short-run.12

After all is said and done, tenure is nothing more than another contract provision

that faculty members prize, universities provide and just about everyone else criticizes Business people could also have tenure All they would have to do is “pay” for it in

terms of lost wages However, business people typically don’t have the same strong

reasons for wanting tenure as do professors Tenure survives in the academies of the

country mainly because faculty members aggressively demand it (even those who believe

strongly in the value of markets) and because universities voluntarily negotiate it

Tenure’s long-term survival and the competitiveness of university labor markets suggest

that the trade is mutually beneficial

Concluding Comments

This chapter has used cost-benefit analysis to develop an economic model of government

In government as well as private industry, producers in a monopolistic market position

will tend to exploit the lack of competition for their service A government bureau that

has no competitors is in an enviable bargaining position vis-à-vis legislators and

taxpayers As the sole producer of a service, it can charge higher prices and deliver

poorer service than competitive producers would

12

After tenure is awarded, faculty efforts should be expected to decline, while, at the same time, their pay rises In the midst of the tournament, the new faculty members will exert unduly high amounts of effort, simply because of the prospect of being rewarded in the future by higher pay and greater job security Also, the rise in compensation and fall in effort that accompany tenure may correlate with the fact that the added money makes it possible for faculty members to buy more of most things, including great leisure (or leisure-time activities) If we did not expect new faculty members to anticipate relaxing somewhat after attaining tenure and enjoy, to a degree, being “overpaid,” we could not expect the tenure tournament to be effective as a means to an end, which is disclosure of the limits of new faculty members’ true abilities

In many cases, then, the performance of government bureaucracies can be improved by the introduction of competition for their services Where possible,

alternative sources of a government-provided good or service should be encouraged If government bureaus have to compete with other producers by lowering their prices or increasing the quality of their service, they will be forced, like private producers, to reveal not just what they want to do, but the limit of what they will do for the consumer’s business

The democratic system provides checks and balances to control the exploitation

of power in government Voters can vote not to re-elect officeholders who abuse the public trust They may not do so reliably, however, because of imperfect information The fact that democracy is not a completely efficient system does not mean that a non-democratic form of government is preferable We have noted, however, that people will also seek protections from the problems intrinsic to democratic governance They can do this with constitutional restrictions on what governments can do Inside firms, workers can protect themselves from workplace democracies through contract restrictions like tenure Owners of firms need to be mindful of the fact that if they move toward

“participatory management,” they will have to provide worker protections from the majorities’ abuse of democratic governance in the workplace, or else the firms will have

to pay higher wages

Review Questions

1 Is it desirable, in your opinion, that government generally adopts policies intended

to please the median voter group? Why or why not?

2 It is sometimes said that a rational decision must be based on perfect information Would it be rational for a voter to acquire perfect information about politics? Would it be possible?

3 What effect does increased competition have on the slope of an individual firm’s demand curve? Why? How does a change in the slope of a firm’s demand curve affect its efficiency? How do these effects apply to government bureaucracy?

4 “Competition forces producers to reveal what they are willing to do at the limit, not just what they want to do.” How does this statement apply to government bureaucracy, and to legislators’ ability to control it?

5 Write down all the government-provided services you can think of Which of

them must be provided by government bureaucracy? Which could be provided

through competitive contract? Why?

6 When would workers want and don’t want democratic governance in the

workplace?

READING: The Mathematics of Voting and Political Ignorance

Gordon Tullock, University of Arizona

Public problems are normally more important than private problems, but the decision by any individual on

a private problem is likely to be more important than his decision on a public problem, simply because most people are not so situated that their decision on public matters makes very much difference It is rational, therefore, for the average family to put a great deal more thought and investigation into a decision such as what car to buy than into a decision on voting for president As far as we can tell, families, in fact, act quite rationally in this matter, and the average family devotes almost no time to becoming informed on political matters but will carefully consider the alternatives when buying a car Why is that the case?

In order to address the question we need first to ask a more basic question: What is the payoff to the individual from voting? Assume that you are in possession of some information and have decided that you favor the Democratic Party or, if is a primary, some particular candidate The payoff could be

computed from the following expression:

BDA - Cv = P

B = benefit expected to be derived from success of your party or candidate

D = likelihood that your vote will make a difference

A = your estimate of the accuracy of your judgement (-1<A<+1)

Cv = cost of voting

P = payoff

Certain aspects of this expression deserve a little further discussion The B refers, of course, not to the

absolute advantage of having one party or candidate in office, but the difference between the candidate and

his or her opponent The factor labeled A, the estimate of the accuracy of the voter’s judgement, is

included here because we are preparing to consider the amount of information held by the individual, and the principal effect of being better informed is that your judgement is more likely to be correct The factor

labeled A can take any value from minus 1, which represents a certainty that the judgements will be wrong,

to a plus 1, which indicates that the voter is sure he or she is right The choice of this rather unusual way of presenting what is really a probability figure is due solely to its use in the particular equation, not to any desire to change the probability notational scheme For the equation to give the right answer, it is

necessary that A have a value of zero when the individual thinks that he has a fifty-fifty chance of being

right

The factor labeled D is the likelihood that an individual’s vote will make a difference in the

election; that is, the probability that the result if he were to vote would be different than it would be if her were not to vote For an American presidential election, this is less than one in 10 million Cv is the cost, in money and convenience, of voting For some people, of course, it may be negative They may get

pleasure, or at least the negative benefit of relief of social pressure, from voting If we view voting as an instrumental act, however—something we do not because it gives us pleasure directly but because we expect it to lead to some desirable goal—then our decision to vote or not will depend on weighing the costs and benefits

Let us put a few figures into our expression Suppose I feel that the election of the “right”

candidate as president is worth $10,000 to me I think I am apt to be right three times out of four, so the

value of A will be 5, D will be figured as 000,000,1 Assuming that my cost of voting is $1.00, the

expression gives ($10,000 x 5 x 000,000,1) - $1.00 = $.9995 It follows from this that I should not bother voting

It will, however, be worthwhile to consider a few variations on the expression In the first place, it

is frequently argued that this line of reasoning would lead to no one voting This is not true If people

began making these computations and then refraining from voting, this would raise the value of D, since

the fewer the voters, the more likely that any given vote will affect the outcome As more and more people

stopped voting, D would continue to rise until the left side of the expression equaled the right At this

equilibrium there would be no reason for nonvoters to begin to vote or for voters to stop Presumably the

people voting would be those among the population who were most interested in politics, since D would have the same value for everyone but (B x A) would approximate a positive function of political interest

The equation, if it is thought to be in any way descriptive of the real world, would imply that people would be more likely to vote in close elections This hypothesis has been tested and found to be correct

Let us now complicate our model An additional factor, C i, the cost of obtaining information, has been included in the first equation

BDA- C v - CI = P

This, of course, the cost of obtaining additional information, since the voter will have at least some

information on the issues as a result of his contact with the mass media Of course, A is a function of information (A = ƒ(I)), and hence each increase in information held will increase A and thus raise both the

benefits and the costs The problem for the rational individual contemplating whether or not he or she should vote would be whether there are any values of C I that would lead to a positive value payoff

Suppose, for example, that the investment of $100.00 (mostly in the form of leisure forgone) in

obtaining more information would raise the value of A from 5 to 8 Using the same amounts for the other values as we used previously, P = -$100.9992 Clearly, this is even worse than the original outcome

Furthermore, these figures are realistic The cost of obtaining enough information to significantly improve your vote is apt to very much outweigh the effect of the improvement This is particularly true for the average voter, who does not have much experience or skill in research and who would put a particularly high negative evaluation on the time spent in this way

A further implication of our reasoning must be pointed out There may be social pressures that make it wise for the individual to make the rather small investment necessary for voting In terms of our

equation, C v may be negative In these cases, voting would always be rational Becoming adequately informed, however, is much more expensive Further, it is not as easy for your neighbors (or your

conscience) to see whether you have or have not put enough thought into your choice Thus, it would almost never be rational to engage in much study in order to cast a “well-informed” vote For certain

people (and presumably most readers of this book will fall within this category) A may already be quite

high For intellectuals interested in politics, the amount of information acquired about the different issues for reasons having nothing to do with voting may be quite great Further, for this group of people, the value put on the well being of others may be higher than in the rest of the population It may be, then, that these people would get a positive payoff from voting even though the avera ge citizen would get negative returns from taking the same action Thus, for many of the readers of this book, voting may be rational I have my doubts, however The value put on the well being of others must be extremely great Further, my

own observation of intellectuals interested in politics would not confirm that A is high for them They may

have a great deal of information, but this seems to have been collected to confirm their basic position, not

to change it

Excerpted with revisions and permission from Gordon Tullock, Toward a Mathematics of Politics (Ann

Arbor, Mich.: University of Michigan Press, 1972), pp.111-114

International Trade and Finance

It can be of no consequence to America, whether the commodities she obtains in return for her own,, cost Europeans much, or little labor; all she is interested in, is that they shall cost her less labor by purchasing than by manufacturing them herself

David Ricardo

ations never really trade; people do This simple point is important, for

international trade allows us to approach international trade as an extension of models already developed, rather than a completely new topic Earlier discussion focused on the local or national marketplace In this chapter, our marketplace will be the world We divide our discussion of international economics into its major subdivisions,

international trade (mainly dealing with the exchange of real goods and services across national boundaries and their terms of trade) and international finance (mainly dealing

with the exchange of national currencies and their exchange rates)

INTERNATIONAL TRADE

Of course, there are differences between international and domestic trade—enough to make international economics an important subdiscipline of the profession Some

differences are obvious, like the many different national currencies, cultures, institutions, laws, languages, artificial barriers (tariffs, quotas, embargoes, health regulations), and

countercyclical domestic policies, involved in international exchange Others go largely unrecognized An intangible but significant factor is the difference in people’s attitudes toward domestic and international trade—call international trade nationalism As

Abraham Lincoln is supposed to have said, “Domestic trade is among us; international trade is between us and them.” Yet people all over the world trade with each other for the same reason: They stand to gain from the transaction in spite of the politics There is much greater immobility of resources than commodities between nations International

trade is the substitute for the international movement of human and property resources, especially people

Understanding that trade is between people, not nations, is important for another reason If we focus solely on gains from trade to nations taken as unified political

entities, we may overlook the distributional effects of international commerce—the gains and losses to individuals As we will see, while international trade increases a nation’s total income, international trade reduces some individual’s incomes and increases others’

To evaluate objections to free trade among nations in proper perspective, we must

recognize these hidden gains and losses

N

Objections to free trade can be explained easily in terms of market theory A

major principle of economic theory is that each individual competitor has a vested

interest in reducing competition Competition forces product prices down and spurs

product development and, in the long run, restricts business profits to only the

risk-adjusted profit opportunities available elsewhere Thus it is natural for domestic firms to

seek protection from their foreign competitors—but protection only increases the prices

consumers must pay Carried to an extreme, protection based on the narrow interests of particular sectors of the economy can reduce everyone’s income On this basis rests the case for free international trade

After examining the advantages of international trade from a purely national

perspective, we will look at the distributional, or individual, effects The chapter closes

with a discussion of the pros and cons of protectionism

Collective Gains from Trade

Most of the gains from trade result from allocating resources in the most efficient manner

and from the reduction in the social opportunity cost—each geographic area produces and exchanges those things for which it is best suited to produce With nations selling those

things with the lowest opportunity costs, joint output is maximized and consumption

opportunities are enhanced Adam Smith told us more than two hundred years ago about the nature of the gains from trade: It is a maxim of every prudent master, never to

attempt to make at home what it will cost him more to make than to buy.” 1 Trade also

allows a greater variety and wider choice of available products The gains from it are

clearest when there is no domestic substitute for an imported good For example, the

United States does not have any known reserves of chromium, manganese, or tin For

those basic resources, which are widely used in manufacturing, American firms must rely

on foreign suppliers The gains from trade are also clear for goods that are very costly or difficult to produce in the United States For example, cocoa and coffee can be raised in the United States, but only in a greenhouse Obviously it is less costly to import coffee in

exchange for some other good, like wheat, for which the United States climate is better

suited

Foreign competition also offers benefits to the American consumer By

challenging the market power of domestic firms, foreign producers who market their

goods in the United States reduce product prices and expand domestic consumption

Foreign competition also increases the variety of goods available Without competition

from the twenty or more foreign automobile producers who sell in the American market,

the three U.S automakers would each get a much larger percentage of the market They would be loess hesitant to raise their prices if consumers had fewer alternative sources of supply Collusion among major manufacturers would also be much more likely without

the presence of foreign competitors

International trade also promotes specialization, whose benefits are fairly clear

By concentrating on producing a small number of goods and selling to the world market,

a nation can reap the benefits of greater efficiency and economies of scale Resource

1

Adam Smith, The Wealth of Nations (New York: Random House, Modern Library edition, 1937), p 422

savings that are not initially obvious may be gained Indeed, after considering the

following example, some readers may doubt that international trade can be mutually

beneficial

Consider a world in which only two nations, the United States and Japan, produce only two goods, textiles and beef Assume that the United States produces both textile

and beef more efficiently than Japan That is, with the same resources, the United States can produce more beef and more textiles than Japan can It has an absolute advantage in

the production of both goods An absolute advantage in production is the capacity to

produce more units of output than a competitor can for any given level of resource use

A comparative advantage in production or cost is the relative advantage based on

comparative ratios such that either the absolute advantage is greatest or the absolute

disadvantage is smallest Comparative advantage is more important for trade than

absolute advantage As long as the relative productivities or costs differ between

individuals, regions, or nations, the participants can engage in mutually beneficial trade

Let’s see how these differences work out for people

Suppose that Lisa is worth $100 an hour in market work and only $10 an hour in home or household work Her husband Gary is worth $8 an hour in the market and $4 in the home Lisa has an absolute advantage in both tasks, but a comparative advantage in

market work She is ten times more productive in the market than at home; he is only

twice as productive Her comparative advantage (largest advantage is in the market; his

comparative advantage (smallest disadvantage) is in the home She should work in the

market; and he should work at home Their combined productivity would be $104 per

hour (her $100 market rate plus his $4 home rate) If instead Gary worked in the market and Lisa worked at home, their combined productivity would be $18 (his $8 market rate plus her $10 home rate) They would be $86 (equal to $104 $18) better off by utilizing their comparative advantage, with Lisa working in the market, where her comparative

advantage lies (her greatest absolute advantage, $92 over his) and Gary working at

home, where his comparative advantage lies (his absolute disadvantage is smallest, $6

less than hers)

Table 17.1 shows these absolute and comparative differences for nations With

the same labor, capital, or other resources, the United States can produce thirty units of

textiles; Japan can produce twenty-five If the same resources are applied to beef

production, the United States still outproduces Japan, by ninety units to twenty-five

Under such conditions, one might think that trade with Japan could not possibly benefit

the United States The relevant question is not how efficient the United States is in

absolute terms, however, but whether the people of the United States can make a better

deal by trading with Japan than they can make by trading among themselves

This is determined by examining the comparative advantage, or the ratios of

advantage or differences in relative efficiencies A nation has a comparative advantage

where (1) its absolute advantage is greatest or (2) its absolute disadvantage is smallest

Generally, a nation will have a comparative advantage in those products that require in

their production a large proportion of factors that are relatively abundant and inexpensive

in that nation and a comparative disadvantage in those productions that are relatively

scarce and expensive in that nation It is a technological fact that different products

generally require in their production different proportions of the factors

TABLE 17.1 Comparative Cost Advantages, Beef and Textiles, United States and Japan

Maximum Units of Textiles (Zero Beef Units)

Maximum Units of Beef (Zero Textile Units)

Domestic Cost Ratios

In Each Nation

Mutually Beneficial Trade Ratio, Both Nations United States

Japan

30

25

90

25

1 textile costs

3 beef

1 textile costs

1 beef

1 textile trades for 2 beef

To determine which is the better deal, we must compare the costs of production

We know that there is an uneven distribution of economic resources among nations This produces differences in productive capacities based on these differences in relative factor endowments If each nation produces and trades the products in which it has a

comparative cost advantage, trade can raise both their incomes Remember that a

comparative advantage is the capacity to produce a product at a lower cost than a

competitor, in terms of the goods that must be given up The United States may have an

absolute advantage in the production of both beef and textiles, but it may have a

comparative advantage only in the production of beef In other words, the United States must forgo fewer units of textiles to obtain a unit of beef than Japan Although a single

nation could theoretically have an absolute advantage in all commodities, it could not

have a comparative advantage in all commodities With two nations and two

commodities, if a nation has a comparative advantage in one commodity it must have a comparative disadvantage in the other commodity Having a comparative advantage in

beef necessarily means the United States cannot have a comparative advantage in

textiles—a point that will become clear shortly

In a sense, the United States trades with itself every time it producers either beef

or textiles If it produces beef, it incurs an opportunity cost; it gives up some of the

textiles it could have produced If it produces textiles, it gives up some beef In Table

17.1, every time the United States produces one unit of textiles, it gives up three units of

beef (It can produce either thirty units of textiles or ninety of beef—a ratio of one to

three.) Thus the United States can benefit by trading beef for textile if it can give up

fewer than three units of beef for each unit of textiles it gets from Japan

Japan, on the other hand, gives up an advantage of one unit of beef for each unit

of textiles it produces If Japan can get more than one unit of beef for each unit of

textiles it trades, it too can gain by trading In short, if the trade ratio is greater than one

unit of beef for one unit of textiles but less than three units of beef for one unit of textiles,

trade will benefit both countries The United States will gain because it has to give up

fewer units of beef—two, perhaps, instead of three—than if tried to produce the textiles