PUBLIC POLICY 55D CLASS NOTES

PROFESSOR JUDITH KELLEY

DUKE UNIVERSITY - SPRING 2007

Vanessa Villamia Sochat

CONTENTS

Public Policy 55D – Introduction to Policy Analysis .................................................................................. 2

Elements of Policy Analysis ..................................................................................................................................... 3

Introduction to the Theory of Games...................................................................................................................... 9

Coordination Games .......................................................................................................................................... 10

Competitive Games ........................................................................................................................................... 11

Mixed Motive Games ........................................................................................................................................ 13

Purpose of a Policy Memorandum.............................................................................................................................. 15

Structure of Policy memo ...................................................................................................................................... 15

Theory of Games II ...................................................................................................................................................... 16

Pareto Efficiency .................................................................................................................................................... 16

Sequential Games: ................................................................................................................................................. 17

Repeated Games .................................................................................................................................................... 20

Multi-Party Games ................................................................................................................................................. 22

Individual Preferences and Collective Action II: MARKETS ......................................................................................... 23

Market Demand ..................................................................................................................................................... 24

Producer’s Supply .................................................................................................................................................. 25

Market Failures ........................................................................................................................................................... 29

Public Goods........................................................................................................................................................... 29

Externalities. .......................................................................................................................................................... 32

What is Negotiation? .................................................................................................................................................. 38

Pareto Efficiency .................................................................................................................................................... 41

Ethics and Bargaining ............................................................................................................................................. 44

Negotiations II ............................................................................................................................................................. 44
Multi-issue Negotiations ............................................................................................................................................. 44

Valuing Social Outcomes ............................................................................................................................................. 51

Option 1: The Pareto Principle .............................................................................................................................. 52

Option 2: Voting ..................................................................................................................................................... 52

Option 3: Potential Compensation ........................................................................................................................ 52

Cost Benefit Analysis.............................................................................................................................................. 59

The Discount Rate .................................................................................................................................................. 66

Valuing Life........................................................................................................................................................ 70

Compound Decisions ............................................................................................................................................. 79

Probability .............................................................................................................................................................. 81

The Value of Information....................................................................................................................................... 86

Money and Risk Subjective Expected Utility Theory .................................................................................. 89

Political Analysis 94

Rational Choice Theory ......................................................................................................................................... 100

Politics of Interests II 102

Median Voter Model............................................................................................................................................ 102

Pressure Group Theory ........................................................................................................................................ 104

The Politics of Symbols ............................................................................................................................................. 110

PUBLIC POLICY 55D – INTRODUCTION TO POLICY ANALYSIS JANUARY 11, 2007

Professor Judith Kelley

Introduction
• What is public policy?
• What is policy analysis?
• Goals of the course
• Organization of the course

What is public policy?

 • definition: a public policy is an action by a government that affects public welfare
• Includes
o Laws
o Rules and regulations (FDA)
o Programs (welfare, Medicare) and practices
o Specific policy changes
• at international, national, state, and local levels

Public Policy Examples

• Health and safety
• Poverty and welfare (Medicare/Medicaid)
• Crime (gun control)
• Education (no child left behind)
• Transportation (gas mileage for cars, airbags)
• Environment (Kyoto protocol, global warming)
• Foreign Policy (Iraq)

What is Analysis
• Analysis = taking apart, breaking into components
• Description: what is happening?
• Explanation: why is it happening? (treating symptoms versus problem itself)
• Prediction: what will happen if… (we implement this policy in current situation, what are unintended
consequences?)
• Prescription: what should we do? From whose perspective? Who votes? Are the people who get to vote
the most affected?

Take it apart, describe it, explain it, try to predict all results, and prescribe

What is Policy Analysis

• Analysis of Public policies (eg governmental actions)
• Purpose: inform policy choice
• Multidisciplinary
o Economics
o Statistics
o Political science
o Law
o Ethics
o Sociology
o Psychology

ELEMENTS OF POLICY ANALYSIS

• Define the problem
o What is the problem?
• Identify Policy Options
o What could government do? What are the options? What are financial, practical constraints
 • Predict consequences
o What effects would the policy have?
• Value outcomes
o How do we value those effects?
• Recommend Policy
o What should we do?

Example: School Gun Violence

What’s the Problem?
• guns are accessible
• bad parenting
• violence in video games
• security measures
• bullying in school yard (deep psychological problems)
• gangs
• wave of school violence
What are our options?
• each problem has its own solution
o installing security at school
o mechanical/physical safety measures of gun inspection
o school counselors
o drug free campaign
o public education programs
o after school programs
What effects will they likely have?
• each solution has own effects
How should we value these outcomes?
• willingness to show up to school, fear
What should we do?
• could be a mixture of different interventions

Example: Iraq
What’s the Problem?
• Syria and Iran
• Presence of Americans
• Insufficient troop levels
• Ethnic makeup of police force
• Country not ready for democracy/power sharing?
• Presence of foreign occupying force
• Energy resources (another agenda)
• Middle east political stability (Iraq isn’t the problem, we need to consider entire region)

What are our policy options?

• Surge (implies short term, effective, powerful) word use is important… escalation is a political criticism.
(relates to failed policy in Vietnam)
 • What effects will this likely have?
• How should we value those outcomes? (who are we)
• What should we do?
• Difference between identifying the symptoms and defining the problem

Politics and Policy Analysis

• Being “right” is not enough, have to get majority, get through committee, persuade public
• Policy is made by political processes

Political Analysis
• informing political strategy (who are we dealing with?)
• Informing policy analysis

Goals of the Course

• get set analytic skills
• Communication Skills (basic economic analysis)
• Inform your choice of major

Global Warming Assignment

• write 1 page memo (no particular format)
o answer question “What is problem we face with global warming” NOT what we predict, what are
options.
o NOT GRADED
o Don’t worry about format
o EPA, UN website (read on syllabus)
o Only page only, double spaced, size 12 NY times font Organization of the Course: The website:
 January 16, 2007

Root Causes Causes Symptoms Outcomes we can value

Businesses not reducing
Lack of accountability
Lack of international
agreement
• Kyoto protocol
• Countries like US
bending rules
Problem of the commons
• everybody wants
to cheat on the
agreement,
individual
incentive doesn’t
match group
agreement
Incentives – collective
action problem
Distributional effects that
lead to political fights
(international groups)
Ignorance
Burning fossil fuels: CO2
• transportation
• electricity gen.
Cows/paddies/(agr)
Methane
Landfills/decomposition
Nitrous Oxide
• fertilizers
HFC: refrigerators, aerosols
Deforestation
Combat acid rain
X increase in pop. & tech
Less reflection as ice caps
melt
Greenhouse gases = rising
temperatures
Changes weather patterns
• more intense
storms
• rise in sea level
Ozone layer deteriorating
Redistribution (changes)
rainfall
• droughts, torrents
Polar ice caps melting
Ph oceans change
Ocean circulation belts stop
= ice age
• NEGATIVE
• Wildfires
• Wildlife
• Bears can’t sleep
• Food production
• Shifting seasons
• Mosquitoes- disease
• Bleaching coral reefs
• Availability drink H20
• Coastal Flooding
• Rising
heating/cooling costs
• People displaced
• Energy production
complicated
• Tourism (skiing)
• Water scarcity
• Political conflicts,
violence over land
and water
• Fishing stocks
• Political conflicts over
redistribution
• Killer heat waves
• Moving costs
• Deforestation

POSITIVE
• renewable sources of
energy
• access to new ports
• new land
• access to oil!

Carbon trading • Capturing carbon • disaster management

at emission point
Taxes • water reserves
• Carbon sinks
• gas • strengthen levies
• Taxes (re-establish
• emission incentives)
Subsidies • Finding more
Education efficient fuels

Foreign Aid • Technologies

Regulation • Burn/consume
less

• Renewables

• Increase access
public
transportation

Predicting Consequences of Actions:

• With a tax, we raise price, create large separation between wealthy and poor. Who is the tax on? Poor:
cant drive back and forth to work
Section Meeting January 17, 2007

Memos

• organized with header section

o To:
o From:
o Re:
o Date:

Executive Summary: 3-4 sentences, summarize entire paper. Be direct, upfront, say it and be done with it.
Relatively short sentences, no jargon or flowery language.

For different points, use headers and some separation. We aren’t writing in paragraph form.

ANSWER THE QUESTION! Don’t go off topic. Analyze the question and don’t discuss it

Every sentence should have a purpose. Use active verbs. Don’t conclude the memo, don’t summarize anything.

(memo is meant to advise someone briefly, superior doesn’t have time to read memo)
Individual Interests and Collective Action January 18, 2007

Games, markets, Negotiations, and Governments

• game theory is a way of understanding collective behavior of individuals in collective setting

• if these are incentives and we set everybody loose, what happens?
• It matters what the other player does… the other player’s choices determine how good/bad a choice is
• Payoff varies depending on what other player has done

INTRODUCTION TO THE THEORY OF GAMES

• What is game theory?

• Types of games
o Coordination Games
o Competitive Games
o Mixed-motive games
• Two common games
o Chicken
o Prisoner’s dilemma

Odds and Evens – EXTENSIVE FORM

Squares = choice to be made

 Red Line = simultaneous game (when Student making choice, doesn’t know which node is at)
Payoffs go at end (Win/Lose)

Payoffs are written inside boxes

COORDINATION GAMES
• Definition: Both ‘win’ or both ‘lose’
o Example: which Tire?

Four students partying, sleep in and miss midterm. Call the professor, tell that have flat
tire. Reschedule exam, take exam, and ask students which tire blew.
o Example: Meeting in New York City

• Solving Coordination Games

o Communication
o Conventions
o Focal Points (somehow it’s obvious) There are some outcomes that have higher probability of
being chosen, certain conventions
Choosing Sides

Left Right
Left (8,8) (0,0)

Right (0,0) (8,8)

Pure Coordination Game

Party Home
Party (8,8) (0,0)

Home (0,0) (4,4)

Battle of the Sexes

Party Home
Party (8,6) (0,0)

Home (0,0) (6,8)

(wikipedia game theory sections)

Stag Hunt

Stag Rabbit
Stag (9,9) (0,8)

Rabbit (8,0) (8,8)

COMPETITIVE GAMES
• Definition: If you ‘win’ I ‘lose’
• Also called ‘zero sum’ payoffs + losses = ZERO. My gain is your loss
• Examples
o Odds and Evens
o Chess and other parlor games
o Battle of Bismarck Sea
The Battle of Bismarck Sea
World War II, Pacific War, march 2, 1943- march 4
Location: Bismarck Sea, in the vicinity of the island Lae

Americans, in planes want to bomb Japanese, in ships

It tends to be foggy north of island = difficult to locate ships from air
South of island weather is quite clear.

Americans must decide to search north or south first

Americans want more days of bombing, Japanese want fewer

We can model it the other way around, and put Japanese choice first – If sail North then could get 2 or 1 days of
bombing
They never get a better outcome by sailing South – sailing north is a Dominant strategy. It always does better
Americans have dominant strategy when we see that Japanese has a dominant strategy. Solution is NORTH
NORTH

Some definitions:

• Maxi-min strategy: the strategy with the best “worst” outcome. We want to maximize the worst possible
outcome, or minimize the damage.
o We opt for strategy that avoids worst possible outcome

• Dominant Strategy: A strategy is dominant if it does better than all other strategies in at least one
circumstance and as well as every other strategy in all circumstances (never loses)

• Dominated Strategy: a strategy is dominated by another if it does worse in at least one circumstance and
no better in all (never wins)

• Equilibrium: an outcome is in equilibrium if no party regrets its choice of strategy, no player has incentive
to move away, no player regrets his or her choice.
o Ask if either player would want to switch out of situation if they could, without moving other
player’s choice

MIXED MOTIVE GAMES

• Variable-Sum
• Coordination Elements
• Competitive Elements

Chicken (also called “Hawk-Dove”)

They would rather BOTH look like chickens than one look like a chicken

To win must send message to other guy that you are crazy and won’t swerve!
TWO EQUILIBRIUM: top right, bottom left

Social Implications of the Prisoner’s Dilemma

January 23, 2007

PURPOSE OF A POLICY MEMORANDUM

• provides busy policymakers with information they need to do their jobs

• breads down complex issues into essential facts
• evaluates alternative courses of action
• provides recommendations for action

Out of the box solution to Global Warming: Netherlands huge problems with flooding: building houses that float.

Understanding the Policymaker

• Needs to master complex, substantive issues ina short time

• Needs to make decisions based on partial or imperfect information

Your job is to…

• provide essential facts and supporting evidence
• provide clear options recommendations and give some assessment of the political environment

An effective policy memo should..

• be brief 700 word limit – double spaced
• Include the following
o Heading
o Summary – contain key info (start with, this is the key problem, what are the facts, what I
recommend
o Background (if needed)
o Issues
o Options (pros and cons)
o Recommendation
o Possible limitations/caveats (a section at end) I’m making these assumptions, we should find out
ABC, this doesn’t apply if this happens
• be brief
• avoid technical jargon
• be direct address the person you or we
• be clear – omit needless words
• be well organized
• be honest (its OK to say we need to find out about something)

STRUCTURE OF POLICY MEMO

• The summary
o The issue
o Why a decision is needed
o Key information
o What I recommend
THEORY OF GAMES II

• Prisoner’s Dilemma
o Social implications
• sequential games

Player 1 has a dominant strategy to defect

Both players have a dominant strategy to defect.
Dominant strategy: mutual defect, (2,2) IS an equilibrium, because neither player would change their choice

PARETO EFFICIENCY
• n outcome is Pareto efficient if it is not possible to make one party better off without hurting another
player
• An outcome is Pareto inefficient if one (or more) party can be made better off without hurting another
Which points are pareto efficient? (D,C) (C,D) (C,C)
Pareto inefficient Point: (D,D)  both players could be made better off!

Solving the Prisoner’s Dilemma

• Contracting
• Communication
• Detecting Cheating
• Punishing Defection
• Trust
• Iteration (play again and again to learn from the experience)
• Issue Linkage (punishments, change the game)

SEQUENTIAL GAMES:
• Examples: tic tac toe, Checkers, chess
• Going first may be advantage or disadvantage
Second number is Lucy’s payoff
Two lines through branch indicate “We aren’t going that way”
The arrow indicates the direction we go
If Charley thinks about incentive structures facing Lucy, he would never kick the ball
Backwards induction: start at back/end of tree
• think about what lucy going to do
• and then figure out what I am going to do
It is an advantage to go first
The United states and Iran are both desperately trying to go first by committing to a strategy
When you aren’t sure who is going first, game of chicken dangerous in politics
 • Why does nuclear deterrence work?
• Where do these payoffs come from?
o Logically thinking how players would rank outcomes

• An attack and retaliation is the WORST possible scenario

REPEATED GAMES
• Rounds
• Strategy in the shadow of the future: taking into account today what payoffs might follow from this
decision in the future
• Reputation and trust: are very important. Desired reputation depends on what game you are playing (as
nice and trustworthy, irrational in Chicken , etc)
 3 3 C C
1 4 C D
2 2 D D
2 2 D D
2 2 D D

She was using Tit for Tat strategy

Happiness is a relative thing. We care how our neighbors are doing!

• Dividing the dollar:

o It always makes sense to accept whatever if offered, but at some point one person starts
rejecting, to punish other person for their behavior.

Repeated Prisoner’s Dilemma

• is it still rational to “defect”
o not until the end of the iterative game
o But if it’s rational to defect in round 6, then we should do it in round 5 as well. It unravels!
o The value of trust
o Axelrod’s computer tournament and the Evolution of Cooperation

Tit For Tat

• Rules
o Start by cooperating
o After that, copy what the other player did in the last round
 • Properties
o Nice
o Can be provoked
o Forgiving(if you go back to cooperation I will as well)
o Clear
• Why and how it won the tournament
o It never actually beat another fish, but it ends up getting the most points. A player that defects
all the time might beat someone, but when they play another player they don’t get a lot of points
• the danger
o you could get exploited if playing tit for tat: the strategy is clear and predictable
o it very quickly gets into a negative spiral

MULTI-PARTY GAMES
• coalitions
• voting
• multi-party Prisoners dilemma

Application: Global Warming

• every country chooses: emission reduction or no emission reduction
• Assume:
o If everyone reduces equally, then benefits outweigh costs
o Assume: if you are only country to reduce, costs outweigh benefits
o Assume: if you are only country not to reduce, benefits are a LOT greater costs

Problem is there is payoff for defection

January 24, 2007 Section
INDIVIDUAL PREFERENCES AND COLLECTIVE ACTION II: MARKETS

Markets or Governments?

? – should we let markets or governments take care of a situation?

Ex: Medicare/Medicaid
We have an aging population and skyrocketing HC costs, by 2050 the entire budget will be consumed by
these two programs!

Democrats: cut cost of program through reforms and increase revenue

Republican: need to privatize this business, put out of hands of government into hands of market

Pro Market Position: markets are efficient Governments are wasteful and (sometimes) don’t act in the public
interest

Pro Government Position: markets are unfair and sometimes inefficient. Governments act in the public interest

PPS 55 Stance: When do markets produce desired outcomes and when don’t they?

What is a Market?
• An institution for coordinating voluntary exchange between individuals
• Exchanging
o Goods and services
• Individuals:
o Buyers and sellers

The Appeal of Markets

• coordinates production and consumption
• Efficient
• The “invisible hand”
o Voluntary
o Automatic
• individual interests  public interest

Key Questions
• when do markets work?
• When are markets efficient?
• When are market outcomes desirable?
o Moral issues: lower income individuals cannot afford
MARKET DEMAND
• Froot Loops
• Won’t pay as much for each additional box

The area under the demand curve is the willingness to pay.

Determinants of Demand
• income
• tastes
• complementary goods
• Other goods
o Prices
o Substitutability

PRODUCER’S SUPPLY

Determinants of Supply
• costs of input
o labor, sugar, flour, vitamins
• technology
o machinery, materials
• prices of related outputs
Demand curve = willingness to pay
Supply curve = willingness to produce

Social benefit – social cost = Social surplus (net social benefit)

When are Markets “Good”?
• Even if markets are efficient, we may choose to intervene
o Some people can’t pay for certain product
o Something isn’t equitable
o If market is immoral
o Positive/negative externalities
o Wages
• Distributive consequences
o Willingness to pay vs ability to pay (might be willing but not able)
o Housing, food, education (inherent human rights)
• Ethical/moral consequences
o Drugs, prostitution

Efficiency and Equity

• market outcomes may not be “equitable”
• Initial endowments
o Wealth
o Educational opportunities
o Employment opportunities
o Intelligence
o Etc.

Compensation is not necessarily proportionate to your skill. (professional sports players, CEOs)
January 30, 2007 MARKET FAILURES

MARKET FAILURES

• Public Goods
• Externalities
• Market Power (monopoly, cartels)
• Imperfect information

PUBLIC GOODS
• definition
o low “rivalry” in consumption (zero marginal cost of production)
o (often) impossibility of exclusion, or costly to exclude

Examples of Public Goods

• fighting global warming
• national defense
• clean air
• concert
• park
• voting

Free riders and under provision of goods

Examples of Common Pool Resources

• rivalrous and non-excludable
• Commons problem
o “tragedy of the commons”
o Freeways

• Free riders, overuse

Collective Action for a Public Good is a Multi-party Prisoner’s Dilemma

• (Il)logic of collective action (producing outcomes that aren’t to benefit of society

• Free riding is problem

Solving Collective Action Failures

• Negotiations
o Cheating
o Enforcement
• Government
• Privatization
• Social Norms –attach public stigma, encourage behavior, give sticker to vote!
Network externalities: a positive consumption externality, if I’m the only person in the world with a cell phone,
only me and my mom can interact in the network. As more people join the network, the network increases in
value.
so we should raise demand curve by that amount, because there is benefit to third partes
Solving Externalities
• regulation
• Incentives (internalizing the Externality)
o Tax
o Subsidize
• Negotiated compensation: winners pay losers
Coase’s Theorum: It doesn’t matter who is doing paying… if property rights are well assigned in advance, then
parties can negotiate amongst themselves and come up with solutions!

Requirements:

• property rights are well defined

• people act rationally
• transaction costs are minimal
Problems?
• are we comfortable with selling our rights?
• Is the goal always the efficient outcome?
• Barriers to negotiation
o Effective legal system?
o Transaction costs?
o Information
February 1, 2007 Negotiations

WHAT IS NEGOTIATION?

• To arrange or settle by discussion and mutual agreement

• A mixed motive game with communication
• It is difficult to negotiate where neither will trust (Samuel Johnson)

When do we Negotiate?
• Daily life
o who cleans the room
o how much to pay for the car
• Workplace
• Law
• Policy and politics
o Passing a law
o International treaties

Bush plan for Iraq

What is Negotiation Analysis?

• technique for modeling negotiations
• predict range of possible outcomes
• inform strategies for effective negotiation
• it is a science and an art

Elements of negotiation analysis

• parties
• issues
• interests
• alternatives to agreement
• zones of possible agreement

Parties
• who plays? It isn’t always so obvious
• Two or more?
• Monolithic or not? (making decisions independently) Congress has to back the president
o 2 level games – Is ratification required?
o What is the deadline? (expiration presidential term)
o Does needing approval later an advantage or a disadvantage? Could help!

• in Salty Dog: two parties, buyer and seller

Issues
• dimensions of joint choice
 • one or more?
• Are the issues and subsequent negotiations recurrent/repetitive?
• Linkage effects (DOHA)(sanctions): connecting a payoff to a negotiation. If we’re negotiating about cotton
and we can’t make an agreement, if we link it to something else, then we might be able to reach a deal.
o Earmarks must be made transparent… sneaking something into bill, maybe to get them to agree,
make incentive to pass bill because there is some other payoff to him.(making a side deal so loss
is offset elsewhere)
o Log-rolling: you vote for this bill, and I’ll vote for yours (a tradeoff)
• In Salty Dog, one issue: price.

Interests
• preferences with respect to issue outcomes
o some idea of what they want out of negotiation, inherent to them
• competing interests (I want window, you don’t)
• complementary interests (harmonious, more coordination games, we both want window, have to work
out details) we seek the same goal
• convergent interests (not necessarily competing, but not entirely in agreement) we have issues!
o Britain and US have convergent interests… not same, but aligned in what they want out of
situation.
• In salty dog: competitive
o Buyer wants low price
o Seller wants high price

Alternatives
• is agreement required? You think you are negotiating over X, but the alternatives wind up dictating the
agreement. Alternatives are important in outcome of negotiation
o is it always mandatory to reach an agreement? It isn’t always optional… we can fail to meet
deadline, but must come up with emergency plan
• Best Alternative to Negotiated Agreement (BATNA). What is your BATNA? What is your “best alternative
to a negotiated agreement?
o (If you don’t reach an agreement)
• reservation price or value:
o reservation price:
o buyer’s is 16,000, most willing to pay
o seller’s is 13,500, most willing to sell
o what is the value? We might value something differently than what our reservation price is. The
car may be valued at 25,000, but we know can’t sell for more than 15,000
• better alternatives strengthen bargaining position

Other Questions to Consider?

• Are threats possible?
• What are the norms? (relationships/settings with certain norms that prevail influence how negotiations
are conducted)
 o spouse vs. professor relationship.
• Is third party intervention possible?
o Deals with lack of trust, a mediator
• Are there time constraints?
• Are the contracts binding?
• Are negotiations private or public?

Zone of Possible Agreement

• outcomes better than BATNA’s are possible for agreement (ZOPA) is this zone
• Location of reservation values define a Zone Of Possible Agreement (ZOPA)

The surplus is a value space. Each possible agreement is a point on this line

Pareto Efficiency!
PARETO EFFICIENCY
• A pareto improvement makes at least one party better off and no party worse off
• An outcome is pareto efficient if there are no possible pareto improvements

Distributive Bargaining
• leaning and influencing (divvy up fixed good or value)
• Anchoring and framing
o First offers
• Commitment
o Patterns of Concession
• The EndGame
• Ethics

Anchoring and Framing

• perception matters
o we hook onto a number, and then make adjustments. The first number thrown out frames the
negotiation
o High uncertainty
o Anchoring

Kahneman and Tversky experiment (how the human brain makes shortcuts)
• framing is the idea that starting points matter
• implications for first offers

Anchoring
• people make estimates by starting from an initial value
• adjustments
• tend to typically insufficient
• Percentage of UN members that are African?
• “10”: 25% “65”: 45%
ISSUE SPACE. Framing High: pushed in favor of the seller, seller first offer is high. Risk of going too high and
having other person think you are ridiculous

If we can commit, we shrink the ZOPA.

Common patterns of agreement are in the middle of the ZOPA, moreso than the sides

ETHICS AND BARGAINING

• The problem
o Temptation to “strategically misrepresent”
o Fear of being lied to
• Prisoner’s Dilemma
o May fail to reach agreement
• Iteration and reputation

NEGOTIATIONS II
MULTI-ISSUE NEGOTIATIONS

Escalation

• Logic of Escalation
o Sunk costs
o Marginal calculation
o “Actions that appear rational when taken one at a time, can lead to disaster in the long run.
o Psychology of escalation

Dollar Auction
Arguing how to divvy up pie
Multi-Issue Negotiations
• one issue negotiations are largely about dividing a fixed pie
• multi issue negotiations are about baking a bigger pie (and dividing it)

Instead of moving along a distribution, there are pareto inefficient points

Integrative bargaining: we push out together
But we also have to worry about distributive bargaining, diving between two parties (sideways arrow)

Analyzing the Nari-Situation

• Nari
• G.D.

Issues
• number of aircraft Nari + GD -
• barrels of oil Nari - GD +
• support levels Nari + GD -
• timing of delivery Nari - GD +
• guarantee Nari - GD -
• radar Nari + GD +
• spare parts Nari + GD -

Alternatives
• reservation values are given
o Nari = 900
o GD = 500
o We need to map these in value space and convert these to utils
Sources of Joint Gains
• finding complementary interests
• trading on differences in relative preferences
Integrative Bargaining
• Tactics for Creating Value
o Sharing information
 o Joint Problem Solving

Barriers to Effective Integrative Bargaining

• lack of information
• complexity
• Mistrust
• “claiming” behavior
o Misinformation
o Commitments
o We cling as much value as we can for ourselves without thinking about expanding frontier

The Negotiators Dilemma

• The choice: create or claim value
• Like prisoner’s dilemma
o Both should try to create value and then distribute it

What is the “Public Interest?”

Rationales For Government (to take some kind of action)

 • public goods (non excludable and non-rivalrous)
• Externalities
• Negotiation Failures
o Mistrust
o Lack of communication
o High transaction costs
o Complexity
o Claiming behavior
• inequalities or other value violations

Modes of Government
• direct provision of goods or services
• market perfecting (or improving)
• regulation
• negotiation facilitation
• redistribution

Direct Provision
• pure public goods such as Defense
• “tax and spend” may be pareto improving
• Problem: imperfect public goods (it isn’t clear they actually exist)
• Examples
o Location-specific goods: a national park?

People that live closer can benefit more
o Group specific goods: NEA? PBS?

Market Perfecting
• Taxes or subsidies
• Aligning private costs and benefits with social costs and benefits
• Examples
o Gasoline taxes
o Research subsidies (or tax breaks)
• Issues
o how much is enough?
o Income and distribution effects

Regulation
• restricting private actions not in the “Public interest”
• Examples
o Driver’s licenses
o Drinking age
o Pesticide
o Food additives
• Issues
o Enforcement leads to inefficiencies, equity is also an issue
Negotiation Facilitation
• contract enforcement
• judicial system is government’s way or trying to enforce contracts
• Mediation: get two sides to come to agreement
• Arbitration: parties both agree that YOU come up with solution

Redistribution
• Rationales for redistribution
o Initial endowments
o Unfair processes
o “lumpy” prizes

• Policies
o Progressive taxation: you pay more if you earn more
o Social insurance (persons with higher income less eligible for benefits, Medicare)
o Affirmative action

• Property Rights vs Social Welfare

o “Fair” is equal vs. “fair” is respecting property
o Equalizing the well-being of individuals

We care about outcomes: welfare

How to judge well-being instead of income?

UNIT II: VALUING SOCIAL OUTCOMES

What is the Public Interst?

A PPS55 Social Decision

• 171 pieces of candy

• What to do?
o Who are we?

1. Everybody gets 1
2. Preferences
3. Fight over them
4. Consider what people already have, initial assets
5. Lottery system
6. Give out by age or sex
7. Have a dictator
8. Voting system (popularity contest)
9. Dukies
We have to decide what our goals are, and agree, and then narrow down options, and systematically evaluate
each strategy, do that one

We could vote

Representing the Public Interest

• social welfare is a function of individual welfare (but it isn’t clear what function)
• Not clear what kind of function
o Paternalistic?
o Anonymous? (we don’t think about initial endowment)
o Valuing equity?
• who is the public? Who gets to be a part of this?

OPTION 1: THE PARETO PRINCIPLE

• The pareto principle
o Make pareto improvements!
o If everyone is at least well off, then there is no question that social welfare has improved
• Limits to the Pareto Principle
o Rarely do policies allow a pareto comparison
o Usually, someone is better off, someone worse

Is the sacrifice of one person worth the benefit of others? When do we allow tradeoffs?

OPTION 2: VOTING
• voting to reveal welfare
o individuals judge their own interests
o majority may be better off

Issues
• does not measure strength of preferences
• Voting does not guarantee a unique “winner” (Arrow’s impossibility theorem)
• “Tyranny” of the majority

OPTION 3: POTENTIAL COMPENSATION

• Potential Compensation (Kaldor-Hicks)
o If we could pay the losers from the gains of the winners then the policy is a kaldor hicks
improvement
o Government favors groups that get them elected!

• Social Benefit Cost Analysis: employs potential compensation criterion

• Does not address equity questions

We do analysis
Who is being helped, harmed
Could winners compensate losers
Equity Considerations
• Ad hoc consideration
o If there are equity concerns, address then separately

• Could use explicit weighting choices

o The poor literally count more, or
o Heavy weighting bias toward equal distributions

Social Judgment a la PS55

• One issue at a time
o Allows the marginal analysis
o What governments really do
Option 3: Potential Compensation

North Korean talks:

Reached agreement today. Talks teetering on brink of collapse because of disagreement of what should be
guaranteed to NK for ending nuclear program. Was making excessive demands electricity and oil… but we don’t
have option of walking away. Out BATNA is so bad that we MUST settle within the ZOPA. They demanded 2
million tons heavy fuel oil. They have record of starting from unrealistic bargaining position – this is where history
of negotiations comes in. We have history so we know this is excessive demand that is going to be coming down.
This negotiation went on for 16 hours… NK agreed to shut down facilities for 1 million. They got half of what they
asked for. Deal sends wrong signal around world – if you hold along long enough in negotiation, you are rewarded.
So we damaged our reputation. The US had to say that we are going to walk away.

Potential compensation (Kaldor Hicks)

• if we could pay the losers from the gains of the winners

Cost benefit Analysis Employs

• Potential compensation criterion

• does not address equity questions (we only care about the net benefit)

Equity Considerations
• Ad-Hoc consideration
o If there are equity concerns, address them separately. SO we consider them, but don’t let them
change our decision/stop us from realizing that society overall is net benefit.
o Could use explicit weighting choices
• Heavy weighting bias towards equal distributions
o The poor literally count more, or
o Heavy weighting bias towards equal distributions

Social Judgment a la PS55

• one issue at a time

o Allows a marginal analysis
o What governments really do
• placing values on outcomes (we have to find ways to do this) and on costs as well
• Social costs versus social benefits (we want to maximize net) but we have to consider both
o Efficiency: “maximize net benefits” This is the basis of cost benefit analysis

As we Proceed…

• What is the issue?

• What are the feasible choices?
• Who is relevant to the welfare calculus?
• When is “maximum net benefit” the best choice?
The Global Warming Decision

• defining the problem

• identifying options
• predicting consequences
• valuing outcomes (this is the hard part, figuring out how to value these outcomes)

Talked about going to look at houses and looking at two and eliminating one to simplify it

Cost benefit analysis focuses on the red square… the benefits versus the cost, and comparing them with the status
quo. Do we end up with a net benefit?

Defining Benefits and Costs

• value measured by individual willingness to pay (it all comes down to individual willingness to pay… how
much do people value outcomes, in dollar amounts?)
• Benefits: goods and services that people value!
• Costs: represent foregone goods and services that people value (we could have done something else with
that money… it’s the opportunity cost)
• Limited resources  opportunity Cost
Decision Process

• Analysis: “do nothing or “do this”

• Identify costs and benefits
• Value costs and benefits
• Choose option with highest net benefit

Social Benefits and Costs

Goods and services

that People Value

(take some away, these are costs) so cut away a piece of the pie.

And hopefully end up with a little bigger pie as a result of paying for the cost

Example: Tennis Courts

• City of Durham is considering building two new tennis courts on land owned by the city

Step 1: Identify benefits and costs

Step 2: Make decision if it is a good idea

Construction costs money, and land costs money.

Valuing Costs and Benefits

 • both costs and benefits are ultimately a measure of willingness to pay
• Costs = opportunity costs = willingness to pay for foregone goods and services

• Market prices (representative of what people willing to pay)

o How do we get value of tennis?

Look at price of tennis lessons

Propose tax and see if willing to pay, vote

Survey

Take income of people in Durham into account, poorer individuals may not have ability
to pay so value the courts lower than higher income individuals.
• indirect market prices
o whatever we are consuming/trying to create is available in the market, so we can see what that
is, how much it costs for construction.

We can’t directly observe value, but we can look at other relevant values in the market
that are similar and try to get an indirect measure of prices
• surveys (ask people how much they value something, how much we’d have to pay them to not have that
good)
• Statistical methods to isolate value
o Ex: clean air is hard to put value on.

Think of health affects of dirty air

If we could find two houses that are comparable in all ways, except one is in dirty area
and one in clean area, statistically isolate affect of clean/dirty air. Compare prices, and
this is amount people are willing to pay

Back to this… we get a net benefit, so it’s a good idea!

We have to do a Disaggregated Analysis.

Tennis Players Other Residents Society of Durham

Social Benefits
Tennis 25,000 0 25,000

Social Costs
Construction -500 -9,500 -10,000
Land -500 -9,500 -10,000

Net Benefits 24,000 -19,000 5,000

Transfers
Fee -20,000 +20,000 0

Net Benefits (new) 4,000 1,000 5,000

• we are assuming that 5 percent of Durham taxpayers are tennis players and that the tax is distributed
evenly across residents

We do an internal transfer between the people, and still wind up with 5,000.
Problem: the fee is forced on people… there is a DWL to society… introducing a fee might change the
behavior of people, (like a tax) and change the equilibrium
We see that this is very inequitable. Some people are benefiting a lot, others are losing a lot
Issue: Transfers

• fees paid by members of the community to other members are transfers

• Would a fee be more equitable?
• Might a fee change the net benefits?
• User fees may reduce net benefits if fewer people enjoy the good
• Transaction costs of a transfer (it costs money to collect the fee, administrative costs must be considered)

The people who value playing tennis LESS than the fee aren’t going to pay tennis anymore! We lose part of the
benefit because of the fee. From the perspective of the city, this is BAD, we want optimal benefit for people in
society.

Types of Transfers

• Fees
• Taxes
• Subsidies
• If there is no change in behaviors, then there is no change in net benefits.
• If transfers change behaviors, then net benefits can change
o Example: Medicaid. (at certain threshold, people eligible for benefit… may not take job if it
makes them ineligible)
Issue: Why is Labor a Cost?

• could be working elsewhere, opportunity cost

• Depends on whether or not there is unemployment in the sector that is relevant
• Key issue: Opportunity cost to society
• When full employment, use of labor represents an opportunity cost.
• When unemployment, use of labor does not represent a cost (and wages are transfer) wasted resources,
people sitting at home doing nothing! If labor isn’t a cost, then it is a transfer.

Issue: Standing

Who gets to be part of our analysis?

• courts on the edge of Duke campus
• ½ of those using courts are Duke players (how does that change our analysis? We don’t pay taxes so city
of Durham…)
• Should Duke students Willingness to pay count as much as Durham residents? Count at all?

Dealing with Outsiders (see chart again)

Tennis Players Other Residents Society of Durham

Social Benefits
Tennis 12,500 0 25,000

Social Costs
Construction -500 -9,500 -10,000
Land -500 -9,500 -10,000

Net Benefits 24,000 -19,000 5,000

Transfers
Fee -20,000 +20,000 0

Net Benefits (new) 4,000 1,000 5,000

http://www.whitehouse.gov/omb/circulars/a094/print/a094.html

COST BENEFIT ANALYSIS (CONTINUED)

• standing (continued)
• Sensitivity Analysis
 • Dealing with intangibles
• Case: lead in gasoline
• Case: Alamodome

Issue: Standing

• courts on the edge of Duke campus

• ½ of those using the courts are duke students
• Should duke students willingness to pay count as much as Durham residents? Count at all?

Dealing with Outsiders

Durham Players Other Residents Society of Durham

Social Benefits
Tennis 12500 0 12500

Social Costs
Construction -500 -9500 -10000
Land -500 -9500 -10000

Net Benefits 11500 -19000 -7500

Issue: Outsider Fees

• Only benefits to individuals with standing count

o Are you a tax payer? Then you have standing.
• However, fees paid by individuals without standing are benefits to those with standing
o (if Duke students paid a fee)

Outsider Fees

Durham Players Other Residents Society of Durham

Social Benefits
 Tennis 12500 0 12500
Duke Players Fee 10000

Social Costs
Construction -500 -9500 -10000
Land -500 -9500 -10000

Transfers
Residents Fee -10000 +10000 0

Net Benefits 2000 500 2500

Questions with Standing

• Do criminals have standing?

o Marijuana growers in NC
o Should criminals have standing in our cost benefit analysis?
o There is no rule about this… varies depending on case
• Do illegal aliens have standing?
• Do foreigners have standing?
o If a foreigner gets killed, do we use the value of his/her life or the cost to the image of our
society?
o Cost benefit analysis of Iraq war has not counted costs to Iraqi families, etc
o Do future generations have standing?

What is sensitivity analysis?

• models and reality

• Parameters: we look at parameters that have a high level of uncertainty, and push models to each end of
spectrum of uncertainty, and see if our decision changes
• Issue: would a different estimate change the decision?
Issue: Intangibles and Immeasurable

• How do we deal with costs or benefits that are hard to measure?

o Sometimes we try to come up with estimates
o Other times, they can’t quantify it and think about it separately
• we tend to overlook putting values on things that are not measurable
• Example: value of old growth redwoods
(you always have to remember the do nothing option)
Maintenance benefits: lead has corrosive affects on engine parts
Switchpoint for Lead in Gasoline

• Switchpoint: 786 + H1 + H2 = 704 + H1 + H3 –D

• Implication

If H3 – H2 – D > 82 then All unleaded

If H3-H2-D < 82 then Low Lead

But politics gets in the way…

Lead in Gasoline: Summary

• What EPA did: Low lead option

• Instance of Benefit-Cost analysis speeding regulation
o Putting numbers on it sped up regulatory process
o Things that couldn’t be quantified were put up against each other
• use of market prices to come up with numbers for things that might be difficult to measure
• Consideration of immeasurable
• Use of sensitivity analysis (where is the switchpoint? How sensitive is our decision to the assumptions we
have made?)

The Alamadome Decision

• take ½ % tax from VA transport authority
• 2% tax on restaurants, putting tax on visitors
o In terms of cost benefit analysis, it’s better to tax the outsiders
o However politics gets in the way

Problematic because may deter people away

Businesses don’t want to have to charge patrons higher cost
• Would change behavior!
• Henry Cissneros is for this thing!
o Upcoming Hispanic hotshot
o Elected with overwhelming majority
o Thinking of running for governor
• why does he want to build a stadium?
o It will make San Antonio a better place

Bring more tourism

Fixated on television, will put San Antonio on the map
• TRANSFER
o More jobs in San Antonio – 1,000 temporary construction jobs

There is high unemployment in San Antonio, so this isn’t a cost
• (normally wages might be considered a cost)
o Ticket prices: $X x 50000(P) x years

• BENEFITS
o Conventions – C
o Other revenue to city – tourism – T
o Sports attendance – 50,000 seats X 10 events/year X $50 X (years last in future)

Paying ticket price is actually a TRANSFER
• Revenue (advertisements) IF from outside
o If is internal then it’s a TRANSFER
• Increased property values (we have to be careful with multiplier effect, that we don’t count money twice.
• TV Viewing: Other people get to watch game on TV (measure by opportunity cost of watching TV, how
much pay for cable station.
 Benefits/ Costs of Alamodome

• Political Costs
• Paying $$ for preliminary analysis to promote – use only if contingent on continuing the project
• Use costs after decision making
• Need production costs for what is to happen in the arena
• Did not calculate $$ of getting an NFL team

Valuing Future Costs and Benefits

• How much is $100 next year worth to you today? –value of money-
• In thinking of the future how is money valued?
• Take lump sum today vs larger amount in the future

Why does the future cost less?

• impatience: want to consume now

• interest (opportunity cost of money) can do things now, can make it more money
• inflation –

Interest Rates

• $Y next year = $X today *(1+i)

• $X today = $Y next year /(1+i)
• Where i is the interest rate

THE DISCOUNT RATE

• used by government to assess benefits/costs

• $Y next year $X today * (1 +r)
• Where r is the discount rate

The discount rate matters

• if r= .1 PV of $100 next year is

• $100/(1+.1) = 90.91

• if r=.15

• 100/(1+.15) = 86.96

Discount Rates compound

• pv of $100 2 years from now

 • = 100/1+r next year
• =100/[(1+r)(1+4] today

• present value of a in year n

• use for cost benefit analysis

• PV of a in yr n = a/(1+r) to n power

The discount rate matters most for distant benefits and costs
• discount rate of .1
• 100 in 2 years = 100 (1+.1)^2

The further in the future, the more the rate matters

• pv of 100 in 20 years
• if r = .05
• PV = 100/(1.05)^20
• Question basic cost of analysis- need to know discount rate
• Time and discount rate are important to determine efficacy of value

Viability of Projects
• can be altered depending on time and amount of discount rate

Sensitivity Analysis
• Analysis to assumption
• Dr of .10 on problem (see green dot)
• Issue would a different rate lead to a different decision
• If rate higher or lower how could it flip?
• Assumption that this problem is linear
• Recalculate with lower dr (see green dot 3)

Example widening I 40
• widen between durham and Raleigh
• cost now and in future
• see note sheet and green dot 4

Sensitivity Analysis
• would a different discount rate make a difference
• if r = .5 then d =.952

Issues in discount rate choice

• real vs nominal interest rates
• different dr for time depending on economy market interest rates are nominal
• market interest rates include risk premium
• calculate rate of return
Issues in discount rate choice
• opportunity cost versus preference for current consumption
• think of how society as a whole benefits from consuming today vs tomorrow
• common real discount rates 3-7%
• RPA tend to think of future and natural resources – may put a higher premium than other agencies
• Issue: is this a question of standing? Type of discount rate can be an issue of standing
• Thinking of future generations- thinking of different individuals in society
• Net present value is important
• For benefit need to place more value on future – will have a lower dr
• If costs far into future may use higher dr

The politics of dr choice

• pension reforms: if the dr is increased, future liabilities decrease and companies can pay less into their
pension funds and reduce the gaps in projected funds
• calculating costs of tax cuts depends on dr
• social security- like pensions- how to fund in future tends to turn on dr need to figure out where it
switches
• discount rate chosen by organization doing a cost benefit analysis
• OMB may suggest/recommend rate as a guideline.
Diana Brown Case:
- the program only covered basic health for poor people, not her transplant
- if it did cover transplants, would become a black hole of funding plus lots of transplants fail, so there is
no guarantee
- the cost of the procedure is a lot, but clearly less than the value we put on life (in cost benefit analysis)
o then why not just fund it?

Money could be used elsewhere – many more units of pre-natal care, for example

There are inescapable tradeoffs: it isn’t just how much we value something, but what
else we could do with the money

There is a constrained pool of money

PROBLEMS IN BENEFIT COST ANALYSIS: VALUING LIFE!

The value of lives is not always equal

- ex: conditional on age
Statistical value of a life, count probability

Inescapable Tradeoffs
• in public and private accounting
• decisions are made in isolation,, everything has value vis a vie something ekse
• buying a car
• supporting public radio
• budgeting for pre natal care

Always look at what else

A “Statistical” Life
* the question is NOT what is your life worth to you?
* Rather the question IS what is it worth to you to reduce chance of death?
What is it worth to society to reduce chance of death?
• think of all we could do to save lives (ex: ban cars) but is it worth it? What is our willingness to pay?

Techniques for valuing life

• market value
o discounted future earnings

ex: all 9-11 article  9/11 victim compensation made different people worth more
depending on what they earned: banker from Cantor Fitzgerald got more comensation
than family of a policeman
• bizarre assumptions
• it shouldn’t be the govt’s responsibility to support a 3 million dollar lifestyle
• plenty of examples of victims of other tragedies whose families don’t get any
compensation
• valuing a life is a necessary evil in government policy analysis
• would have made more sense if they had framed it as a compensation for
forgone income, not for the victim him/herself
• was not designed as a program to compensate families for their losses, but to
save the airline industry and stabilize the economy post 9-11.
• Could be need based
o revealed preference

wage premiums for risky jobs

price premiums for safer products
o willingness to pay surveys

(contingent valuation) how much would you be willing to pay to extend your life for one
year

Discounted Future Earnings

• NPV of expected earnings
• Not the value of a life, but the opportunity cost is calculated your value of life to society
o Problems:

ignores self valuation of life, may be a volunteer, may have many projects which benefit
society

Ignores non market production – what if you volunteer or mentor needy children?

reproduced wage discrimination – women generally receive ¼ less, so are their lives
worth 25% less?

ignore altruistic issues – maybe we value the welfare of others

Revealed Preference
• Approach 1: wage compensation for risky jobs- $ extra paid for job
o How much more are we willing to pay for people to take jobs that put them at risk?
o Being a professor is less dangerous than being a miner
 o Could help gage the value of a life
• Approach 2: price premium for safety devices
o Increased cost of airbags – willing to pay $100 for a .01% reduced risk of death – helps value life
• Problems
o Workers may not be free to choose  wages then would not reflect the risk
o Workes may be misinformed
o Maybe paying for factors other than mortality

Ex: broken leg – health risks, but not life
o Consumers may be misinformed
o Equity: the poor count less

Reproduced valuations based on initial endowments  depends on how much money
you have

The government has some limited amount of $$ to put into programs  must put dollar value on people’s lives to
allocate that money and implement policies
Baby versus old person  we pick the baby but can we put a worth on that?

Willingness to pay (contingent valuation)

• survey: willingness to pay?
• If $500 to avoid a 1 in 1000 risk of death, then implicit value = 500,000/statistical life

Wtp: cont value

• problems
o phasing of survey affects the response
o information/knowledge affects response
o strategic misrepresentation
o low probabilities are hard for us to think about
o equity: poor count less
o chance of death is 2%- how much are you willing to pay for a program which will improve
neonatal care and reduce risk of morality by 6%

Issues with contingent valuation: altruism

• altruism = valuing the welfare of others
o not counted in cost benefit analysis
• not necessarily counted in c/b analysis
• Example:

Issues with contingent valuation: existence value

• existence value
• example 1: Bengal tigers – cost to preserve an endangered species
• example 2: specific lives
o baby Jessica story: saved from a well – lots of media attention
o we think about cute little babies with names and face very different than abstract statistical lives
 o we are no longer thinking about it in a way that accounts for the tradeoffs that the situation
imposes

Estimate of the Value of a Life   never really less than 1 million

- discounted future earnings: low estimates depending on age ~ 1 million (in 1990 dollars) for an infant
- Revealed preference for consumers (?): approximately 1 million (in 1990 dollars)
- Revealed preference for wages for labor risks: < 1 million to > 3 million (1990 dollars)
- Willingness to pay for safety < 1 million to > 15 million (1990 dollars)

Estimates of he Value of Life

• Vicusi (1993)  reasonable studies cluster in the 3 million to 7 million range
• Government agencies use a variety of estimates
o EPA  6.1 million
o DOT (includes FAA)  3 million
o FDA  5 million

Inescapable Tradeoffs
- COPENHAGEN CONSENSUS  ranked world problems in order of return to investment
o Assumption: we have a fixed pie of resources to allocate to world problems
o Winners: AIDS, vaccinations, malaria, water
o Losers: global warming

Very controversial because this affects everyone: AIDS does not
• had an operating value of ONE LIFE – not valuing a western life more than an African life
o people got very upset because a lot of problems (many in Africa) got more attention/would get
more money than ones that affect us

Question: Is the pie of possible expenditures on these problems fixed?

Efficient Frontier?
- the Harvard Life saving study
o calculated how much it costs to save a life in many different programs  sometimes it costs less
or more
o discovered that we are not actually on the efficient frontier in terms of lives saved nwith the
money we invest
o if we chose policies on whether the were effective at saving lives we could be DOUBLE the
amount of lives saved

ex: it costs a lot more to save 1 life by installing seatbelts in the rear middle seat of all
cars than by administering AIDS tests

Techniques for valuing Life

• take home points
• 3 ways to think about the value on a life
o Market Value- complication to put a value on a life, discounted future earnings used
o Revealed preferences

Wage premiums for risky jobs

Price premiums for safer products
o willingness to pay surveys

contingent valuation to get people to put monetary value on life

Dealing with Uncertainty

• uncertainty
o game trees and decision trees used to help
o random events an uncertainty we cannot predict, how to model this and make decisions
o learn how to draw decision trees

Examples on uncertainty

• career decisions
• medical decisions
• plea bargaining litigation
• disaster planning eg biological terrorism

Decision Analysis
• Technique for modeling decisions under uncertainty
• Uncertainty modeled as a probability – out a figure estimate on what we think an event will be

Alamodome Example
• Key choice: build or not
• If don’t build what next?
• If build what then?
• First thing to put in model is decision
• Key uncertainty will the team come? Do we know the uncertainty – element not know

Go to slide on alamodome decision tree Case 1 slide

To solve decision trees go from back just as with game trees

Elements of decision analysis

• choices
• choice nodes
• choice branches
• chances
• chance nodes
• chance branches

• probabilities

• consequences – very end of branches

Resolving decision dilemmas
• the expected monetary value at any chance node is weighted average of the expected $$ values of the
outcome branches from that node
• Example
• To resolve a decision tree, average out and fold back

Expected monetary value

• if offer a bet of 99% chance of winning 100 vs 1% chance of losing 1000.

• Proportional balance – weighting
o Expected value of bet =
o .99*(100) + .01*(1000) = 99-10 = 89

• risk aversion/risk loving

• Alamodome decision tree

Switchpoint for p
• switchpoint for values

Robust or sensitive
• if switchpoint is far from estimated value, decision is robust. Will have to change probability a lot before
changing decision. Value of 50 million vs 200 million would need to be wrong in original assumption to
have a robust value
• if switchpoint is close to estimated value – decision is sensitive- close to assumption

Double risk dilemmas: the national petroleum reserve

• problem: dependence on imported oil makes the US vulnerable to embargo
• question: should the US spend money to maintain a national pet reserve?
• Ultimate ?: in thorough analysis would indicate amount to be stored
• Choice node would be reserve vs not reserve

nd
2 cut analysis national petroleum reserve
• issue: all embargos are not alike
• can be partial or total
• partial embargos are much less costly

rd
3 cut analysis: the national energy plan
• what if having a reserve has a deterrent effect- that is having a reserve makes it less likely that other
countries will embargo?
 March 6, 2007 Introduction to Decision Analysis

In our memos, the things we didn’t know weren’t necessarily uncertain, we just didn’t have that information.
Challenging for policy makers to make decisions about things they are uncertain about.

Uncertainties…
Public Health: disease, research, predicting scenarios
North Korea: how will they respond? Will they conform?
Iraq!

Multiply independent events = compound probability.

They must be independent! We may not know if events are independent or dependent
 We can use decision trees to think through uncertainties… which include a lot of variables together… so we
use Compound probabilities.

P(Duke > NC State) * P(Duke > Virginia) * P(Duke > Virginia Tech) * P(Duke > Carolina)

Compound Probability Problem

• Probability that Duke wins ACC tournament?

• Duke beats (say) NC State AND
• Duke beats (say) Virginia AND
• Duke beats (say) Virginia Tech AND
• Due beats (say) UNC
• P(D>NC State) * p(D>Virginia) * p(Duke> Virginia Tech) * P(D>UNC) =

.80 * .55 * .65 * .20 = .0528 = 5.28% of winning the ACC tournament

• Assumes odds of beating one team does not depend on outcome of previous games

Second Cut Analysis: The National Energy Plan…

COMPOUND DECISIONS

• Compound decisions: we always have a sequence of choices and chances

• We always solve them by averaging out, and folding back. We calculate the value for each node, then
forget about that part of the tree, we work our way back.
• The last thing we do is prune the tree

Compound Decision: “Fixing” Social Security

• Three Choices
o Do nothing
o Invest in stock market (to try and increase value of holdings, support more ppl)
o Privatize (no longer government’s responsibility)
• Key Uncertainties
o Future stock returns
o Future economic growth

May need to “Bailout” a private plan

• cost depends on Economic growth
o could be terrible if we have a recession
 Probability

Privatization: save 100 billion from not having to collect taxes, etc.

EMV = expected monetary value

• What is NOT bailing out is not an option?

o So if market goes down, we must bail out.
o New EMV = -50 billion

Now Stocks is the best decision!

Issues in Modeling
 • Getting the branches right
o Mutually exclusive
o Collectively exhaustive

Sometimes the best option is neither of the extremes… always think of other options we
could put on the table.
• Start simple. Add complexity where most needed
o Sensitivity analysis (there must be this when we have uncertainty)

Ex. For social security: how sensitive is my analysis to that probability? At what point
(how high would I have to raise that probability) before going into the stock market
becomes a better option than…
o Second (third, etc.) cuts

PROBABILITY

Which is more likely:

• flip a coin four times and get four heads or
• flip a coin four times and get H,T,H,T?
o Both events have equal probabilities, .5 * .5 * .5 * .5 = .0625 = 6.25% chance

EQUALLY LIKELY!

Which is more likely?

• heads with one flip of fair coin (.5) , or
• at least one heads in three flips of a biased coin with a .2 chance of heads?

Probability Quiz

• You see a man in his mid 20s with long hair wearing faded blue jeans. Is it more likely that he is
o A graduate student in Germanic studies or
o A business school student (but if we saw him in FUQUA, we would change our bias/view)
 3. all of outcomes at end branches add up to 1
4. this is the entire universe of B, B happening when A happens, and when it doesn’t

Which more likely

• Heads one flip fair coin .5
• At least one heads in three flips of a biased coin with probability of .2

.2 + .8(.2) + (.8)(.8)(.2)

.2 + .16 + .128 = .488
o It is LESS likely to have heads in three flips of biased coin

Inferences from Imperfect Information

• Graduate student problem

• Very common general problem: drawing inferences from imperfect information
o We use heuristics, a mental shortcut, a judgment based on mental indicators
• Other examples
o Predicting the weather
o Jury selection
o Diagnostic tests
o Predicting election outcomes

We have indicators we can use from the past… what is likely to happen based on set of
conditions, but we are still uncertain!
Predicting the Election
• 65% of incumbent presidents win
• Connection between employment levels and the probability of reelection
• In the past, when incumbents won, the unemployment rate was high only 30% of the time
• When incumbent president’s lost, the unemployment rate was high 85% of the time
• If the rate is low, what is the probability of the incumbent winning? .897

• Question on midterm!
•

For this problem it simplified to P(Win|Low) = p(Win,Low) = .65 * .7 = .897

P(Low) [.65*.7] + [.35 * .15]
 More generally

P(A|B) = p(A) * p(B|A)

[p(A) * p(B|A)] + [p(A) * p(B|A)]

(it’s on the slide!)

March 20, 2007

Which is more likely?

• Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she
was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear
demonstrations

Which is more likely?

• Linda is a bank teller
• Linda is a bank teller and is active in the feminist movement

Conjunction Fallacy

• the probability of two events occurring together (in conjunction) will always be lower than the probability
of either one occurring alone (assuming either probability is not zero)
• Other biases
o False consensus effect – of course you think like me!
o Positive outcome bias – we overestimate the probability of good outcomes happening to us,
optimistic, dangerous from a policy perspective.
o If there is evidence in a story, we tend to think it is more probable to happen

The Value of Information- but how valuable is it, and how much should we pay for it?

• always good to obtain more information to make probability estimate more accurate

Screening Tests

• Tests to screen for AIDS, HIV, drug use, etc

• Consider a hypothetical test for the presence of the HIV virus
• Very sensitive to presence, If have HIV, the test will be positive 99% of time time
• If don’t have HIV, the test will be negative 95% of the time
• Assume .5% of the population has AIDS
 Such a small portion of the population has HIV, we are going to see a lot of false positives

The Power of Additional Evidence

• With AIDS testing, always do two test

• Consider an additional test for those who test positive
• Test characteristics
o –p(+|HIV) = .95  sensitivity
o –p(-|no HIV) = .98  specificity

• new prior probability of HIV = .09

Let’s use…
 P(HIV|+) = p(HIV) * P(+|HIV)
[p(HIV) * p(+|HIV)] + [p(no HIV) * p(+|No HIV)]

= .09 * .95
[.09 *.95] + [.91 *.02]

THE VALUE OF INFORMATION

The FDA does this all the time, at some point says “we’re good,” and they let the drug on the market. Where is
that point? How valuable is it to keep getting more information?

• Generic choice: do we act now, or gather more information?

• Benefit = greater certainty for decision
• Cost of information acquisition
• How do you decide whether to pay for information?

Testing the Waters

• Levi’s is trying to revive its image with a new line of jeans

• Issue: produce full scale or test market
• Executives believe a 60% chance of success (where get this info? Maybe from looking at the past, there is
proprietary older info)
• If successful. Levi’s will profit 25 million
• If unsuccessful, Levi will lose 20 million
• Test marketing will cost 4 million
• If test marketing positive, then .8 chance of success
• If test market negative, then .3 chance of success
At chance nodes (circles) we have to calculate EMV’s
The Value of Information

• Issue: Willingness to Pay for Information

• Find cost of test that makes you indifferent between the two choices (this is the switchpoint)
• Note: Cost of the test does not affect future choices (after, it’s a sunk cost)

Calculate the switch point: T = 2.6, the maximum amount we are willing to pay for the Test.

Types of Probability

• Judgmental: Subjectivity estimated for unique events

• Relative Frequency: Empirically derived for repeated events
Judgmental Probabilities

• most of time we have complex, non repeated events

• Examples
o Probability of troops leaving Iraq in less than 6 months
o Probability of Hillary Clinton getting Democratic nomination (we can’t attach probabilities
because we’ve never had a woman before)
• Solicit judgments from experts
• Problems
o Cognitive biases
o Miscommunication

Important to remember that probabilities are tricky to think about – do policy makers think about probabilities?
The smaller the probability gets, the harder it is to think about.

What is the base population we are dealing with? Even though probability might be small, if the base population is
huge, we could be dealing with a lot of people

We might spend all money gathering information and never take any action – important to be reasonable
MONEY AND RISK SUBJECTIVE EXPECTED UTILITY THEORY

• ? How should government think about risk?

• People have different values for risk

Preferences for Money

• Choice between certain amount of money, and gamble

• $X = .5(100) + .5(0)
o X = $50, at least

The certain monetary equivalent (CME) is the price willing to take for certain, rather than take the gamble
• Assuming I am risk averse, my amount should be less than 50
• If $100 is best and $0 is worst, set U(100) = 1 and U(0) = 0
• Instead of thinking about money, I am going to think about utility

You are indifferent between

 $X and

 a .5 chance of 100 and a .5 chance of 0

So utility of X = U(X) = .5*U(100) + .5*U(0) = .5

• so let’s say that for me, somebody would have to pay me $33 to sell gamble

Preferences for Money

• let’s say the value is $18. We change odds to .75 of getting $100 and .25 of getting zero, so this is a better
gamble. So I should want MORE money than 50 dollars
• Let’s say it’s $59 (just made it up)
• So we can draw…. A UTILITY CURVE FOR MONEY! Figure out how much value people put on money.
 The lowest we can get is zero
The highest we can get is one hundred
CME line is utility for money! Certain monetary equivalent
Utility for $50 might be .7 (CME)
Utility for $50 (EMV) is .5
Utility of expected is lower than utility of certain
I get more utility out of things that are certain
Our certain monetary equivalent is LARGER than the expected monetary value… ?
If we start from utility of .5, then CME of ,5 is 33, and EMV is $50, so Risk premium is $17

Risk Premium

Risk Premium: How much money you will have to pay me to take the bet instead of the certain amount.

Risk Profiles

• If CME line < EMV line(bows to left) then you are a risk averse person.
• If CME line = EMV line then Risk neutral
• If CME line > EMV line then risk seeking

Why might a politician be risk loving with tax payers’ money?

Might be risk seeking if we MUST make certain threshold money
Richer people might be more risk seeking because isn’t as big a cost
If it isn’t our money, we might take more chances
Some people just get a thrill out of the gamble, so they are risk loving
Anomalies with Low Probabilities

* We might not act in a risk averse way if the probability of winning big is really small. If we pay MORE than a
dollar (for .01 chance winning $100) we would pay MORE for that chance.

Someone who was risk averse would have CME line that curves to LEFT of EMV
What we OFTEN see is the picture above. We are willing to take risks when amounts/stakes are low and
probabilities are low, then we become risk averse.

What does it mean in words that the line starts to slope downward? We put less and less value on money the
more we have. So giving tax breaks to rich people – they don’t value it as much if you gave same amount to poor
person.

So we value money less, the more we have. If I have a million in the bank I value it less than someone who has
nothing

Decision Trees with Subjective Utility

• convert payoffs to utilities

• Resolve using expected utility
o This is useful because…

We don’t have numbers for every outcome

We may be making a decision for someone who is risk averse or risk loving

Example: Playing the stock market

• You have $1000 to invest
• Deciding whether to buy US Treasury Bonds or Amazon.com stock
• If bonds, then assured gain of $100
• If stock a .75 chance of making $500 and a .25 chance of losing $1000.

So if we go with risk neutral, we buy stock

-1000 is on bottom because it is lowest possible outcome.

U(-1000) = 0
U(500) = 1

Resulting curve is risk averse

We find $100 (for certain) on the Utility curve, on CME line it is .85
 So we solve tree again for expected utility, and find that we would rather buy bonds over stock (.85 >.75). Given
our risk profile (AVERSE), this is what we are most comfortable with. What is our risk premium? Go back to curve,
read off different values, and find difference

U(.75) = -$200
U(.85) = $100

Risk premium = $300

Risk Aversion Generalities

• We are more risk averse

o The larger the stakes
o The higher the odds of losing

• We are more risk seeking

o When we are playing with “house” money (money that isn’t mine)
o When facing gains rather than when looking at losses… losses are scary!

Should Government be Risk Averse?

• Stakes for each government decision are relatively small for the government
• Exception: war, social security
• When should governments accept risk aversion of citizens?
• When should governments act risk neutral?
• Are governments risk averse?
o Are politicians risk averse, are bureaucrats risk averse?
 • Zambia government didn’t want to take genetically modified grain. If they introduced them into their
market, the European Union (which bans the grain) would say in the future “we don’t want to trade with
you, you are risky to us”
o So EU and US had different attitudes regarding risk… Europeans are MUCH more risk averse
regarding food. We
o We have people who are dying TODAY but if we accept food we are in danger of breaking ties
with EU in future
• Stakes are high in most government decision making
• Government is playing with taxpayers money, so should take that attitude, so we’re risk averse so we
should be that way
• We might need to be risk loving in certain situations, for moral reasons, etc.
• If we are going to die, we might be risk loving. (present is more important than future)
• GOVERNMENTS are making lots and lots of decisions, so they are going to win some and lose some. They
are more like Bill Gates… has a lot of money to play with, and do it again and again, so governments
mostly are risk neutral.

MARCH 27, 2007 UNIT ON POLITICAL ANALYSIS

What’s a risk premium? What are different risk profiles?

Difference between EMV and expected utility

David Stockman

• Who was he?

o Director of Office of Management and Budget (OMB)
o Was asked to review budget deficit

• Reagan’s Campaign Promises

o Reduce taxes
o Balance the budget
o Increase defense spending

So David Stockman has to CUT 40 billion dollars/700 billion (total budget size)  4-5%
The problem is that we can’t touch…
• 350 is social security
• 150 is defense

So we are left with 200 billion – a lot of which are interest on debt

What his attitude towards making cuts?

• believes that government is wasteful, and economy is going to BOOM! (supply side)
• All that really matters is that people believe going to be a change from the past
• Eventually all of these effects would trickle down to the little guy
What does Stockman want the relationship to be between policy analysis (about what would be efficient/effective
economically) and the political process?
• He is very optimistic – structures negotiations and gets people on his side
• So he believes entire political process can be manipulated, he can manipulate it, based on who is in
power, power in numbers
• Changes numbers around in computer, gets different outcome!
• BUT he has to deal with Congress and Senate. How does he deal with them?
o Holds staff meetings
o Gives concessions in some areas not particularly important
o Makes cuts in a variety of areas so no one can complain, they call each other out “hey my budget
was cut too!”
o He’s under time pressure, so he makes quick decisions and doesn’t give department heads
documents to discuss until time of meeting

Ends up backfiring – people figure it out

What problems does he encounter?

• market doesn’t respond the way he thought it would
• attempts to cut backfire, then Reagan goes on TV and says “we’re not touching it”
• puts a budget proposal on table for tax cuts, holds off until future

What happens with tax cutting proposal?

• it gets reworked and eventually passes
• then deficits grow out of control and economy sucks
• a lot of these cuts were fantastic, weren’t real,
• “none of us really understands what is going on with all these numbers” you do NOT want to hear that
from head of office of management and budget!

Then article comes out. And he’s reprimanded, deficits spiral out of control in 1980’s,
You CAN’T cut taxes and increase defense spending by an enormous amount

Politics

1) treated as sing or plural

a) art and science of government
b) public life and affairs

2) political principals or practice

3)

Why Political Analysis?

• Being “right” is not enough

• Politics is not a dirty word
• Everything is (partly) political
 • Strategy matters – just as important as getting policy analysis
• Political analysis MATTERS – we want tools to model things and

The Parable of David Stockman

• from naïve to cynical

• One constant: he is disdainful of political process
• Poor political analysis  his strategy falls apart and becomes ineffective
• Poor political analysis  poor policy analysis

Politics and Policy (there are two extremes)

• naïve idealism: Policy analysis dominates politics (technocratic fantasy)
• Cynical “Realism” : politics overwhelms policy analysis (where Stockman ended up)
• A Balance: Policy analysis <-> political analysis

We have to have a BALANCE between these two things!

The Policy Making Process

• problem recognition
• options identification
• policy choice
• implementation
• policy effect

1. Problem Recognition
• Agendas
o How does something get on a political agenda?
• When and how does the policy process recognize problems?
o Not = “real” problem
• Example: AIDS
o When recognized – called GRID
o How characterized – nation didn’t realize anyone could become victim until heterosexual got
from blood transfusion

2. Options Identification
• what options does the policy process consider?
• Politics limits options
• Examples
o Drugs: Legalization not considered
o AIDS: needle exchanges often not considered
• Relationship to problem identification

3. Policy Choice
• What policies does the policy process choose?
• We don’t often choose the “best” policy
• Policy is a political outcome
• Example: The Crime Bill
o 3 strikes and you’re out
o More prisons
o More police
o No “midnight basketball” it might have worked, but we couldn’t sell it

4. implementation

• how does the policy process implement chosen policies?

• Policies are not always implemented as their choosers imagined
• Example: Community policing (we were going to put more police on the street and it would be safer)
o No Child Left Behind: intended to BENEFIT children’s education, better education, but in trying to
satisfy qualification of policy to get money, we teach towards a test and arguably education isn’t
as good! Hasn’t raised achievement levels, just increased loopholes

5. Effect

• what is the effect of the implemented policy?

• Political response
• Examples
o Prohibition (led to black market)
o No child left behind (decreased quality of education)
o Abortion (led to illegal abortion)
o One Florida (scrapped affirmative action, decided to take top 20% of students and guarantee
admission)
(unintended affects because of implementation)
April 2, 2007

What is basic problem today with health care?

• skyrocketing costs
• extremely complex issue with lots of players
• there are a lot of uninsured people – 15%
• health care is a public responsibility
o people that DON’T have HC get it anyway
o public attitude towards HC reform very positive – 60%
o within the year, it dies!
• what did Clinton’s task force propose?
o Employer mandated
o Malpractice reform

Players

• trial lawyers
o didn’t want malpractice reform
• Dingell: Chairman of energy and commerce
o Favored
• Business roundtable
o Small businesses: didn’t favor, opposed because can’t afford extra cost
o Big businesses: originally in favor  bill promised to cut some costs

But ultimately OPPOSED because promises of cuts of spending weren’t followed through
on
• Newt Gingrich and Dole: house min whip
o Strongly opposed: late in game blocked negotiations on GATT
• Boggs: lobbyist working for opposition, representing trial lawyers, malpractice reform, wants to make sure
that malpractice part taken care of
• Hillary Clinton: Task force
o FOR!
• HIAA
o Opposed – run Harry and Louise AD: sit around kitchen table talking about HC… slogan was “they
choose, we lose”
• uninsured Americans (poor), unions, senior citizens
o FAVOR
• drug companies
o OPPOSED – worried about government control over them
• Ira Magaziner: Chairing tax force with Hillary, brainpower behind entire thing
o FAVOR
• Doctors
o American Medical Association: didn’t want small doc offices
• Media
o Neither for or against, but key player
House: 258 dem 178 Rep
57 Dem 43 Rep

What happened that was really bad?

The draft was leaked! Somebody said Clinton proposing 150 billion dollars in taxes!

Political Bargaining

Basic Orientation

• Unit of analysis: Individuals (or groups) with interests

• Interest maximization (rational choice)
• Shared power
• Politics = bargaining: everything that we can achieve is the result of bargaining

Players

• Who plays? (first ask this question)

• People in positions
o Formal positions (people in government)
o Informal positions (media)

Issues
• dimensions of possible outcomes
• Altruistic interests
o Concern for others
o Idealism
• preferences are stable and transparent and accessible
 • We assume that people’s basic interests don’t change

RATIONAL CHOICE THEORY

Rules and Institutions

• formal rules
o constitution laws, rules of congress, etc
o voting rules
• informal rules
o norms
o standard practices
• Rules matter
o Example: fast track for trade
• Bargaining over Rules

Sources of Power

• Better alternatives
o Ability to improve own or worsen others alternatives
o Ability to change the game
• Allies
o Who are our allies?
• Skill

Individual Behavior: Rational Choice

Players choose strategy that maximizes interests

Issues  interests  behavior
Behavior  institution  outcomes
Outcomes = political result
Results depends on
Players, the issue space, interests
Rules and institutions
Strategy choice

The Collective Action Problem

• diffuse interests face collective action problems

• Examples:
o “pork barrel” spending – spending for projects that are inserted into bills that are likely to pass to
secure funds for certain members district to increase chances of re-election!
o Campaign finance reform
APRIL 5, 2007 POLITICS OF INTERESTS II

Median Voter Models

Pressure Group Theory
Demand for Political Information

? – Why do politicians look so much alike?

• Both move towards center to try to get “midline” voters, because voters on the extreme are all set.
• All the voters are in the middle (looks like standard distribution)
• TWO HUMPS: democratic voters and republican voters… somebody might come in and try to capture the
middle, but with two they would have to have an agreement, otherwise the other party would take the
center

MEDIAN VOTER MODEL

• we usually think of a single issue, easiest to model

• Assume if there is a vote for something, majority wins
• The question is which candidate or which proposal will win?
o People vote for proposal closest to their preference, even if it’s far away
o Why can’t we take average of what everybody wants?

Not the case: it isn’t just which candidate or proposal will win

Mediated through who has power of proposal, power to vote, sometimes proposals
created based on getting votes

Uses for the Model

• Candidate elections
o Predicts race to the middle for two parties
o
 o Primaries? Three parties?
• Policy proposals (eg health care)
• Implication: centrist outcomes close to median voter’s ideal
• HC reform didn’t work well because was such a large step at one time… we learned we have to take more
gradual steps!

PRESSURE GROUP THEORY

( says we shouldn’t expect centralist outcomes, should expect extremist outcomes)
 • Interest groups
o Industry groups (auto makers, farmers, etc)
o Unions
o Consumer Groups (consumer’s union)
o Issue groups (NRA, ACLU, AARP)
• Seek legislation of some ($) value to them, willing to pay for that legislation
• Politicians need money to get elected

Votes can be translated into money

Rational Choice Framework

• Players
o Politicians
o Interest groups
• Issue:
o Usually one dimensional
• Interests
o Politicians want to be re-elected
o Interest groups wants legislation
• Rules
o Informal: politicians trade votes for contributions
 o Formal: time to pass legislation, frequency of election, committee members, campaign finance
law.

Bigger interest group has most power, realize nothing will happen if they don’t step in, so then maybe two more
groups step in to push for legislation, but then last two (smallest?) groups freeride! Only very big interest groups
put out a lot of money, and smaller ones free ride, so interest groups have problems.

• The larger a group is, the harder it is to operate as a collective (organize)

o We should be more likely to see politics that benefit a few that has diffuse costs, because no one
takes time/bothers to protest
• Concentrated groups have a harder time getting what they want

BENEFITS

COSTS

Diffuse Concentrated
Diffuse
Most likelihood of passing?
Easier than when benefits are
diffuse because there are
fewer ppl so strongly for legis.

Concentrated
Example: Campaign Finance

• Issue: who gives money to campaigns?

• The calculus of giving: B-C
• Givers = wealthy, with narrow interests
o The diffuse group isn’t sufficiently organized to donate money
• prediction: members of congress maximize chances of reelection and do special interest bidding
• Move away from median voter’s ideal to uglier model

? – Which model is right?

• salience of issue makes accountability larger

What motivates voters to be informed and make decisions may not be as obvious as we think… does that make us
rational? I make choice to gather as much information as I deem necessary to make decisions

Theory of rational ignorance: it’s rational for me to not invest enough time to know everything

We elect people to know everything for us, we pay for information, pay for others to sort information, we latch
onto people that we think have similar views to ourselves and free ride on them. – we use heuristics. When we
think of these models, we have to think of how voters assess/evaluate all of this. We make assumptions about
people being rational and informed, but it all depends

Example 2: Trade Politics

• Issue: level of tariff protection

 o Cotton farmers benefit a lot from getting subsidies, even though not a lot get… we have a
concentrated group
• Assumption:
o Social economic efficiency = free trade
• Moving towards or away from free trade not Pareto improvement.
o Eg: winters and losers from less free trade
• consumers vs producers
o each consumer loses a small bit
o each producer gains a huge amount
• calculus of involvement, collective action

Pressure Group Issues

• trying to get someone else’s share of the pie = “rent-seeking” behavior

• interest groups are primarily redistributive
• trying to increase the size of the pie = “productive behavior”
• so in trying to shift pie around, we make the pie smaller!
• From the perspective of an interest group, the benefits are the same
• From a societal perspective, we don’t want to spend resources (lobbyist) shifting pie around

Policy predictions
• Cost benefit analysis
o We should expect policies to pass that are social surplus enhancing projects – use resources on
ones that grow pie the most!
• median voter model
o no, that isn’t what is going to happen! We have centrist policy, people go towards center so we
have incremental policy
• Pressure group model
o No! neither of those! Projects more likely to benefit few at the small expense of many. How
concentrated are the costs and benefits?

So we have to ask ourselves which of these models/ways of thinking is most appropriate

Limits to Rational Choice

• sources of interest, people have different interest

• collective action, we have these problems that fly in the face of thinking about rational choice because
people don’t act rationally
• rational ignorance: it is rational to be irrational in the domain of being informed/ how much information
we choose to consume

The Market for Political Information

• Anthony Downs and theory of “rational ignorance”
• Demand for information
o Consumers
 o Producers
o Entertainment
o Policy choice
• political news is largely entertainment
APRIL 10, 2007 THE POLITICS OF SYMBOLS

• it’s important to understand the language of symbols!

Phenomena Not Well Explained by the Politics of Interests

• Attention: we pay attention to different things!
• Beliefs: why do people have different beliefs?
o We have beliefs about how the world works, crime in America, etc.
o More deaths from suicides than homicides
• Values
• Behaviors
o Individual behavior
o Mass movements

Symbolic Politics
• how do all of these things interact with our policy and political analysis?
• Central perspective we take: Politics is like a theater
• Key Assumptions
o About human nature
o About political phenomena

Human Nature
• Rationally ignorant: important to remember because we would be fully informed, harder to get caught up
with symbols
• Symbol users: evoke whole system of beliefs, a viewpoint,
• Reality constructors
o Perception
o Memory
o Beliefs
• people are constructors of their own reality, reality is what we make of it
• movie with four people watching murder
o they all have different accounts of murder!
• meaning and identify seekers
o we actively try to connect the dots, try to make sense of things
• Story tellers: we try to tell stories in a way that is convincing

Social Behavior
• symbols are socially constructed things
• hammer/sythe: workers, under communism
• red cross and red crescent:
• flag of gay movement: symbolizes acceptance of diversity, we’re all different, but we’re all part of the
rainbow
• shared stories, myths
What’s a Story? The Structure of Narrative

• Plot:
o Linear: beginning, middle, end
o Something happens
• Bipolar symbolic landscape: good and evil, oversimplifying the truth, we have heroes and villains
• Protagonists
o Heroes
o Villains
o We MAKE people into heroes and villains
o Under the new deal, welfare etc was thought of something GOOD that was going to assist
victims… it wasn’t a program in the sense it was thought of in the 70’s and 80’s – when welfare
recipients were stigmatized… they were VICTIMS
• dramatic tension

Plot Forms
• Falling action = tragedy… the nightly news!
• Rising action = OJ simpson story, here he comes, he rises up becomes fantastic, and then screws up!
• Rising Action = comedy or epic

Political Stories
• Political stories “frame” issues
o What angle are we showing it from? What do we allow into the frame?
o Framing can allow people to IDENTIFY with something and motivate political action!
o We want people to think I CAN RELATE! I’m part of it!
o Examples

Bosnia: Vietnam or Holocaust?

“Tax relief”, “Partial Birth Abortion” “Death Tax” “Marriage Penalty” “war on terrorism”

Framing

George Lakoff:Don’t think of an elephant

• Every word evokes a frame
• Negating a frame evokes the frams
• Evoking a frame reinforced the frame

The Media as Storyteller

• Most political information comes from news stories
• What makes news?
o Unit “the story” is what we sell. You can’t just present a bunch of boring facts, need a story
Doing Symbolic Analysis

• Textual Analysis
o Actors
o Symbolic landscape – what are the symbols?
o Narrative structure – what is the structure of this story?
o Meaning – what is the larger meaning?
• Explanation
o Prediction
o Prescription: spinning, reframing
 MOVIE!

What are the symbols? The narrative? Use of story? Perspective/framing these issues

Actors

Student Non Violent Coordinating Committee (SNCC)

Southern Christian Leadership Conference (SCLC)
Have differences about strategy
They needed to engage uninterested white power structure, mobilize public opinion
• Can’t vote = not free, battle for voting rights!
• Eyes on the Prize: showed group of people marching together, unity, transformed into American flag,
these are Americans!
• Addressed as “negros”
• Martin Luther King Jr. symbol of non-violent successful strategy!
• Ellis County – student nonviolent coordinating committee, SNICK, voter registration campaign, had
resistance… SNICK exhausted with little money
• Southern Christian leadership conference and Martin Luther King Jr.
o King responsible for just raising money?
o James Forman: Wanted movement that would survive, not just a charismatic leader
• Jim Park, sheriff: counted on to draw media attention to WIN Washington
• Some political leaders understood tactics and didn’t want to get caught in middle
o Mayor Joe Smitherman: Young mayor with no BG or experience, big eared guy

Said Martin Luther KOON! That’s got to hurt

½ dallas county citizens black, less than 1% registered by 1965 – few blacks that lined up got in, and getting in
doesn’t equal registration

President Johnson: eliminate every remaining obstacle to the right and the opportunity to vote
Katzenbah:

Arrested Amelia Boynton: teachers marched to court house in protest, knowing could be fired.
The power of public demonstration, sheer number of people

Rev Reese: marched to rally at church –

teachers march first black middle class demonstration in Salma. Teachers are LEADERS they have huge
influence in community

Reverend Vivian confronted sheriff Jim Clark and deputies on court house steps – I am rep ppl in Dallas county and
I have the right to do so… am I saying the truth? (had crowd behind him) This is a national problem… with Jim
Clark it was a clear, physical engagement there is effort to get cameras away

Must take a responsibility for everything… gesticulated with fist to show power. It’s time for us to say to (gov
officials etc) we will have no alternative other than to engage in broader and more drastic forms of civil
disobedience to bring attention of nation to this in Selma Alabama!
Death of Jimmy Jackson, protecting mother from attack: mourning him was a symbol, created movement…
Can’t protect lives of own citizens seeking right to vote, but can spend all this money in Vietnam

MARCH Have to give people honorable context to eliminate grief… otherwise break down in violence and chaos…
as a response proposed symbol march 54 miles salma to capital Montgomery

Symbolic for moving forward- has beginning, middle, end.

Who else marches?
The military: something they are fighting for, we have respect for them
Evokes idea of Israelites marching out of Egypt out of slavery
• takes 5-6 days, give time to discuss in nation (media) what the real issues are
• Governor Wallace didn’t want it to take place – but 600 people gathered to begin march.
• March led by Jose Lewis and…
• No police in sight! Crossed over bridge, there were police waiting on the other side, under orders to stop
the marchers – they attacked them! It was a game of chicken, and attacking showed how serious they
were, that they wouldn’t “swerve”
o Shock  anger  retaliation? Go get the guns? BAD IDEA! Make people think about specifics
of violence and they realize how suicidal it is.
o State troopers: villains, monsters, marchers look like nice decent people
o Scenes shown to national audience: juxtaposed with film on NAZI war crimes!
o Attorney General said knew would be confrontation, had no reason to believe that would set
upon nonviolent and peaceful citizens in way they did… so blamed someone else?
Chose non-violence because want to be seen as oppressed, victims
o shame on you george Wallace (Yarborough) for tear gas, clubs that broke bones (very specific)
This is NOT the American way.

After beating on bridge… knew wouldn’t send in national guard, sent out call to ppl good will
People came to salma from all over country, clergymen black and white

• We are here to share with ppl of salma with struggle for right to vote… seen violence on TV< here to share
it with you. MEDIA IMPORTANT
• Change in atmosphere, spirit of inspiration, motivation, hope!
• Planned to march Tuesday, Johnson wanted to wait until assured would be no violence,
o Other Frank Johnson banned march
o King never violated federal order, but was pressure to march
o SCLC left decision to march to King… didn’t want him to back down
o Private disagreement and public unity!
o Announcement made that march Tuesday would go forward
o But king told Johnson would call off march… met with King to stress importance of him keeping
his word to ppl that march would go forward… HONESTY in image is important

Tuesday March 9 2000 set out to cross bridge… this times with politicians, members SNCC, southern whites… side
by side with those beaten
Marchers asked to kneel and pray
Rev Ralph Abernathy: Dr King turned marchers around and walked across bridge… wasn’t much else to do… would
have gotten beat up if ran into police line. Sense of confusion… King asked people to stay few more days…

• James Reeb died from blow to head passing night café – marchers mourned him
• News of attack provoke national upcry in many cities, protests and marches.

EQUALITY FREEDOM

Angry that death of white minister stirred nation moreso than death jimmy lee Jackson… nation SHOULD be upset
when anyone is killed, why did it take a white person?

Protecting marchers became issue for President Johnson and governor Wallace – send troops to maintain orders…
the two met in Washington… president Johnson asked if wanted to be remembered as petty men or great men…
Wallace like a rubber band, hoped that Wallace would give press statement determining determination to protect
marchers from Johnson… act like responsible governor!
Hopeful can have solution to problem… did make suggestions… Governor Wallace refused to pay for
protecting marchers. Johnson sensed mood of country and addressed congress…
• 8 days after bloody Sunday, president asked for voting rights bill, used words of movement… their cause
must be our cause too… its all of us who must overcome the crippling legacy of bigotry and justice, and
we shall overcome.
o Everyone cheers, tear ran down cheek, VICTORY – affirmation of the movement.

SNCC still being beaten

Now is the time to… transform Alabama, make justice a reality, etc…
Interviewed people at march…

SCLC heard of plot against King’s life, but King refused to leave march… everyone in blue suit lined up with MLK,
and to this day don’t know why were up there!
Civil rights movement never be same again, it was coming to an end.

Racial violence, 34 died

April 24, 2007 LAST DAY OF CLASS

KNOW ALL terms in the glossary… think about how each term fits in the course

Define rational ignorance, and explain why important in context of…

Here is a newspaper article snippet, name concept that is relevant

NAFTA

What is the problem NAFTA is trying to solve?

Global competitiveness
Tariffs/trade

Issues

Large sucking sound (jobs going out of US) – (Ross Perot) JOBS
ENVIRONMENT
Regulatory Environment

Have to use tools we have learned in this course…

• market analysis
• cost benefit analysis –
o important to do disaggregated analysis because we have distribution issues
• decision analysis
• negotiation theory
o There are a lot of different ZOPA’s coming into play… lots of constraints

Narrow Interest Groups

Pat Buchanan
Ross Perot
Unions
Greenpeace

Different Stories…

Unions: human rights, corporate aid, helping corporations at expense of workers, workers are pawns that are
being sacrificed.. creating image of downward spiral going on for some time, goes against American dream

Grassroots(Greenpeace): NAFTA could be good for environment because make way to impose environmental
requirements on all these countries. Greenpeace take out advertisement in newspapers, message is “kills
dolphins” Long time agenda that organization already head, just now linking onto NAFTA.

Ross Perot: Ran in election, trying to survive as a political player. Paints pictures of American workers become
poor (like Mexican workers?) Said that we are going to converge into Mexico… and type of life. SCARE TACTIC
Pat Buchanan: American independence, constitution, statue of liberty is ALL being threatened! Globalization is
going to suck up/obliterate what the US stands for (values) We are going to become a subsidiary of the global
order. Ship that carriers in its cargo the virus of globalization

What is the political problem they are facing in passing NAFTA?

Facing lopsided congress, few people committed, a lot of people against, have to win ALL undecided…
even the Democrats aren’t all on board!

They come up with a three pronged strategy

In Congress: Clinton speaks to each Congressman individually and talks to them until he convinces them… makes
phone calls to all undecided people. Senator Bill Bradley goes to House and talks with all of reps… at first their
message is “just hold off on your commitments – stop the bleeding” don’t choose sides yet! Hold off! Give us some
time!

Industries (side deals): Particular industry group very unhappy with this deal – SUGAR industry… NAFTA could
enable to flood American market with cheap sugar, sugar businesses in America go out of business. Redefine
“sugar” in the agreement. Basically making deals on the margins, increasing some of the ZOPAS. (industry groups
pressure congressmen, congressmen support)

Public: bring in former presidents, Clinton, Raegan, Carter, and Bush.

Carter attacks Ross Perot,
Clinton talks about NAFTA moving us ahead, into the new age.
TV advertisements, bring message that NAFTA is going to bring more jobs, tell story that NAFTA

There are a lot of tools, strategies that we learned, it isn’t just ONE that provides insight into an issue. We have to
use a whole package of tools together!

Answer ? why we need public policy – give us rationale for when government action is needed and non needed,
also give us analytical and communication skills