Question

Define the following:

               a) Discrimination Coefficient

               b) Contract Curve

               c) Principal-Agent Problem

               d) Efficiency Wage

               e) Phillips Curve

Answer 1

a) Discrimination coefficient is the indicator that shows the gap between the values of a factor such as wage for two different social group. For example the discrimination coefficient for wage differential among men and women would show the extent of wage gap between men and women.

b) Contract curve is the locus of all the indifference curves within an Edgeworth box that depict pareto efficient allocation of goods.

c) Principal agent problem is a situation in which among two parties in a contract, one party has more information about the situation in hand and does not bear the dntire responsibility of his actions. For instance, when an insurance company sells a car insurance, the owner of the car spends less time and money to maintain the car since part of the loss in case of its damage will be borne by the insurance company and the insurance company can't monitor the level of care of all it's customers. This is also known as moral hazard.

d) Efficiency wage refers to the higher wage (above the reservation wage) offered by companies in order to ensure that the workers work more efficiently and are more productive as they may not be offered a higher wage elsewhere and will work to keep the job.

e) Phillips curve is the curve that shows the relationship between inflation and unemployment level. It is a download sloping curve showing that as unemployment increases, inflation declines i.e there is a trade off between the two.