In Unit 5 we illustrate how different institutional frameworks – defined as the ‘rules of the game’ – lead to different outcomes, including the distribution of income. We do this by modeling a series of interactions between actors with different endowments – a landowner and a worker. The unit also discusses inequality, introducing the use of the Gini coefficient as a measure of inequality.
The unit works through a series of institutional frameworks – forced labour, take-it-or-leave it employment or tenancy contracts for workers with alternative work options, and workers with democratic political rights – and applies the tools of constrained choice problems (indifference curves and feasible sets) to determine the outcome in each case. The resulting allocations can be evaluated according to the criteria of Pareto efficiency as well as procedural and substantive fairness. This unit provides an engaging application of fundamental economic concepts.
The modeling of the interactions has been substantively revised, and further detail has been included to situate the various cases in historical and contemporary contexts. We have replaced the previous example of enslaved labour by a more general “forced labour” case. The lengthy discussion of the Lorenz curve has been relocated to the macroeconomic units in The Economy 2.0 – Macroeconomics.
This is the header we’ve chosen for Unit 5.
It shows suffragettes on their way to Boston in the 1910s. Franchise is an institution that can affect economic outcomes.