Vocab Words

Positive - factual statement about what is. A hypothesis or theory about how things work. Does not make any value judgements. http://ingrimayne.com/econ/Introduction/Normativ.html

Normative - Statement about how things SHOULD be. Expresses whether a situation is desirable or undesirable. http://ingrimayne.com/econ/Introduction/Normativ.html

Tractable - easily managed, controlled.

Parsimonious -
Parsimony is also a factor in statistics: in general, mathematical models with the smallest number of parameters are preferred as each parameter introduced into the model adds some uncertainty to it. Additionally, adding too many parameters leads to "connect-the-dots" curve-fitting which has little predictive power. In general terms, it may be said that applied statisticians (such as process control engineers) value parsimony quite highly, whereas mathematicians prefer to have a more predictive model even if a large number of parameters are required.

Pareto Optimality - Given a set of alternative allocations of, say, goods or income for a set of individuals, a movement from one allocation to another that can make at least one individual better off without making any other individual worse off is called a Pareto improvement. An allocation is Pareto efficient or Pareto optimal when no further Pareto improvements can be made. This is often called a Strong Pareto Optimum (SPO). http://en.wikipedia.org/wiki/Pareto_efficiency

Monotonic - In calculus, a function f defined on a subset of the real numbers with real values is called monotonic (also monotonically increasing, increasing, or non-decreasing), if for all x and y such that x ≤ y one has f(x) ≤ f(y), so f preserves the order. Likewise, a function is called monotonically decreasing (also decreasing, or non-increasing) if, whenever x ≤ y, then f(x) ≥ f(y), so it reverses the order. http://en.wikipedia.org/wiki/Monotonic#Monotonic_logic

Endogenous - The word endogenous means "arising from within", the opposite of exogenous.

Exogenous - Exogenous (or exogeneous) (from the Greek words "exo" and "gen", meaning "outside" and "production") refers to an action or object coming from outside a system. It is the opposite of endogenous, something generated from within the system.

Stochastic - to·chas·tic (st-kstk)

adj.

1. Of, relating to, or characterized by conjecture; conjectural.

2. Statistics

a. Involving or containing a random variable or variables: stochastic calculus.

b. Involving chance or probability: a stochastic stimulation.

The Time Horizon Problem

I have a lot of research ideas and such that I need to catch up on posting, but I wanted to jot down this one quote/thought while it is just fresh. I just read a paragraph of an agency theory paper that made me think of the environmental problem:

"The Shorter time horizon for the agent and the superior information of the agent set up the classic tradeoff in accounting: we would like accounting reports to reflect information that is forward looking, but forward-looking information is less reliable and more manipulable. In particular, the short time horizon for the agent makes it more important that the principal have a forward-looking performance measure in order to motivate the agent to be 'long term' in his thinking. However, the short time horizon for the agent also means he has greater opportunities to avoid having to settle up if he misleads the principal about future prospects." (Lambert, JAE 2001)

This is a big part of what leads to environmental and social externalities. There is no way to tie management compensation to long-term thinking. Therefore, CEOs are essentially getting paid to maximize the short term at the expense of the long-term. Externalizing short-term costs to long-term resources like the environment is the rational decision for the agent because his performance is evaluated using short-term measures. This is probably not the optimal solution for the agent in the presence of a long-term performance measure that is not manipulable, but in current models, long-term performance measures are too easily manipulated to allow for optimal contracts based on long-term measures.

I don't know how to solve this problem, but, i do know that it is related to other problems that I am thinking about. I want to keep that in mind.