The Role of Assumptions in Economic Models

An economist builds a model to compare a worker's productivity under two different payment contracts. Contract A is used in the first period, and Contract B is used in the second period. The economist observes that the worker's output is significantly higher in the second period and concludes that Contract B provides a better incentive structure. Which of the following scenarios, if it also occurred, would most seriously undermine the economist's conclusion?

Evaluating the 'Self-Interest' Assumption in Economic Models

The Importance of Constant Assumptions in Economic Models

When using an economic model to determine which of two different institutional arrangements leads to a better outcome, it is methodologically sound to assume that the individuals involved become more skilled and productive between the first and second scenarios.

An economist wants to isolate the effect of a single change in a rule or contract on an economic outcome. To do this, other key factors must be assumed to remain the same. Match each of the following experimental scenarios with the specific assumption that has been violated, thereby making the economist's conclusion unreliable.

An economist is comparing two different 'rules of the game' for how two individuals divide their joint output. The first set of rules is used in Period 1, and a new set of rules is introduced in Period 2. The economist observes that total output is higher in Period 2. During Period 2, one of the individuals also develops a new skill that makes them personally more productive. Given this information, the economist can confidently attribute the entire increase in output to the new rules.

Evaluating a Policy Impact Study

An agricultural economist wants to test if a new farming technique increases crop yield on a specific plot of land. The study compares the yield from last year (using the old technique) with the yield from this year (using the new technique). To ensure that any change in yield can be correctly attributed to the new technique, which of the following factors would be the LEAST critical to assume has remained constant between the two years?

Evaluating a Company's New Incentive Plan