Self-assessment questions for lecture 1, How Institutions Emerge

Self-assessment questions for lecture 1, How Institutions Emerge

Question 1: Thomas Hobbes provided an early normative justification of why there ought to be a state. Which is his point of reference and how does he describe the foundation of statehood (please provide a brief answer).

Thomas Hobbes in his work “Leviathan” clearly argued that there should be a state in order to avoid the anarchy. Thomas Hobbes explains that in anarchic condition, the life of man is “solitary, poor, nasty, brutish, and short”. According to Hobbes, society is a population beneath a sovereign authority, to whom all individuals in that society cede some rights for the sake of protection. Any power exercised by this authority can not be resisted because the protector's sovereign power derives from individuals' surrendering their own sovereign power for protection.

Question 4: Name some milestones of the development of the British welfare state. Identify the main driving forces of this development.

Civil War (1642-1651) and Glorious Revolution (1688) led to dramatic change in the political institutions and economic institution which had important implications for the future of democracy. Outcome was a restructuring of political institutions that severely limited the monarchy’s power and correspondingly increased those of parliament and led to much greater security of property rights. It placed power into the hands of a parliament in which was represented merchants and landowners oriented towards sale for the market. Sustained economic growth begun in Britain by the late of 18^th century.

Question 5: Which were the driving forces behind the development of the welfare state in Singapore? In how far is the case of Singapore similar, in how far is it different to the case of Britain?

It was claimed by the People's Action Party (PAP), the governing party since 1965 that adopting the developmental state strategy is for Singapore's best interest due to its unique feature of social, political, geographical and economical condition. At first, PAP’s economic strategy was to provide cheap and disciplined labor and it provides a stable political system; Singapore has only one labor union that is directed by the PAP government. As a result, many multinational corporations (MNCs) invested in Singapore and soon Singapore became to be a solid manufacturing base

However, the PAP soon realized that if Singapore was to move forward to industrialization then it needed to improve its national education. For example, in 1970, the Vocational and Industrial Training Board (VITB) was launched to provide technical education for workers who dropped out of secondary school. Singapore government has adopted a special view of new international division of labor; it has placed itself as a global city in the Southeast Asian region. According to Saskia Sassen's "global cities", they are cities where headquarters which are committed in participating of globalization networks and they are the result of strong integration of urbanization and globalization.

Self-assessment Questions for Lecture 2, Markets and Efficiency

Question 1: Which allocation mechanisms other than the market exist?

• Other allocation mechanisms:

– Bilateral bargaining (bazaar)

– Auctioning (people bid until nobody wants to raise)

– Budget

Question 2: Define: Efficient production. Referring to this definition explain why production points within the production possibility set but not on the frontier are inefficient! Hint: The production possibility set is the area bounded by the production possibility frontier.

Efficient Production is given the available factors of production it is impossible to produce more of one good without producing less of another

Self-assessment Questions for Lecture 3, Corruption

1) How is corruption usually defined?

Common definition: Misuse of public office for private gain.

Or an outcome reflecting a country’s legal, economic, cultural and political institutions

3) Elaborate on the argument that corrupt transactions may or may not result in efficient outcomes! Which benefits and costs are taken into account by the parties to the deal when they decide whether to engage in corruption? Which benefits and costs do you need to take into account to judge whether or not a deal results in an efficient outcome?

• In a strict sense we say that transactions which make some better off and no-one worse off are efficiency enhancing

• But normally, economists say that a transaction increases efficiency if the total benefit it creates to some parties exceeds the total cost it inflicts on other parties

A transaction is efficient if the benefit to the bribe giver is greater than social cost. Social cost includes private cost and external cost (to third party)

• When is a corrupt transaction inefficient?

► Social cost is greater than value to bribe payer

► for example, when selling a construction site in a nature reserve the gov’ wants to assess how much people pay for a similar site outside the reserve and add to it the environmental value

• When will a corrupt transaction occur?

► If the payment by the bribe giver is greater than expected punishment for official

► This payment is limited by the value to the bribe giver

► But expected punishment and social cost need not be related!

• So whenever the expected punishment for official is less than social cost the corrupt transaction may be inefficient!

4) Explain how corruption results in wrong incentives in a dynamic setting! Why is the indictment that corruption may have the same effect as a tax on capital particularly damaging?

• Fear of extortion (like planting evidence) discourages transactions in legal economy

• Expectation of corrupt payments is like a tax (on capital)

► wedge between social return on capital and private return to investor

• Human capital formation may be directed from more productive sectors into bribe receiving sectors

5) Explain the capital levy problem and how it relates to corruption!

An unexpected one-off tax on capital or wealth – if it does not induce behavioral adjustments – is efficiency neutral

But if investors expect that they have to pay taxes out of their investment, only investments which are very profitable before tax are realized.

So if corruption takes the form of a capital levy it is likely to be neutral

If it takes the form of a tax on capital (income) it is a deterrent to investment

8) How is the Corruption Perception Index constructed?

• CPI

► Annual Index

► Mainly interested in effect of corruption on business climate

► Based on a range of surveys of elite business people and assessments of risk agencies (see overleaf)

► country rank rather than absolute score enters CPI

• CU asks experts to rate overall level of corruption on 5 point scale

• IL asks: how common are payments of bribes, how significant of an obstacle to doing business are bribes, how frequently are public contract awarded for bribes

• MIG asks to assess levels of corruption, from government ministers to the “humblest clerk”.

9) When do we say that an event A causes event B? How can we test such a hypothetical relationship?

Causal Relationship - is the relation between an event (the cause) and a second event (the effect), where the first event is understood to be responsible for the second. A is exogenous and B is endogenous, where the treatment A causes an effect B.

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