A relative utility function

A utility function, especially when applying the function to a game theory model, should be in a relative term. When we believe people surrounding us have much better happier than us, by ignoring their own preference functions and applying their holdings to our own preference function, our happiness will be lower even if the absolute term is be not very bad. Therefore, in the game theory, sometimes we may accept a lower return as long as we can make ourselves better than other players. Such phenomenon may not always happen; however, it does sometimes exist.

Is Bitcoin real money?

Bitcoin has to have several characteristics to be used as a means of exchange. Firstly, it has to be accepted by all parties. Currently, Bitcoin is not accepted by all parties. Secondly, it can be divided to represent different values. Bitcoin has these characteristics. Thirdly, Bitcoin has to be able to be stored for a certain value. However, currently the price of Bitcoin fluctuates violently, and the value of Bitcoin is usually considered as its exchange rate to USD. Therefore, the value cannot maintain. In conclusion, as Bitcoin violates two of the three characteristics, we currently cannot say Bitcoin has become a new money, despite it can be true in the future.

Asymmetry of information and our economy

Without asymmetry of information, then there is no profitable business. With asymmetry of information, technological innovation could become profitable. Moreover, when the buyers know the cost of the sellers, then the maximum of the price the buyers are willing to pay is equal to the cost. Then there is no profit made for the sellers. Because no business could make profits, people have no incentive to start up their own business. If there is symmetry of information, the market solution becomes very inactive. Under such circumstance, social planning could achieve the allocation of resources, but the incentive for innovation, which I believe is the most valuable factor in advancing our economy, is still missing. Therefore, asymmetry of information always exists and is necessary for our economic growth.

Why is there a business cycle?

We often talk about the business cycle, as we believe that our economy is expanding in an upward trend but has upturn and downturn. The cycle of the upturn and downturn is called the business cycle. However, as we know that each cycle is different from the other, as the factors of the economy are always changing. I think that this is because we always try to manipulate our economy. We are not perfect that we cannot fully understand all effects of the policies and regulations designed by ourselves. The policies we design usually have immediate positive effects that can restore the market confidence and push up our economic growth. However, the negative effects will appear later after some time and cause the economic downturn. Once we realize the weakness in our economy, we start to add more regulations and policies which are also not perfect. Therefore, the business cycle is a man-made phenomenon rather than a natural phenomenon.

Once we receive false data

Sometimes when doing some research, we receive some unreliable data as the data providers may have some personal interests to deviate data from true values. However, if we understand the providers' utility function, it is possible to mitigate the bias of the data that we receive. The data provider wants to maximise the utility gained from deviating the data from true values, however the marginal utility is diminishing. Moreover, the provider wants to minimise the damage caused by deviating the data, and the marginal loss of deviating data is strictly increasing. Therefore, if we are able to model the gain and loss of the data provider from deviating the data from true values, it is possible to correct the data to true values.

The two views of bankrun

There are two views of bankrun. One view is bankrun is sunspot that it happens completely exogenous of the performance of  the economy and happens to be a coordination game where players choose to cooperate on the inefficient equilibrium. On the other hand, there is the business cycle view that bankrun is associated with economic condition, especially in a downturn, a bankrun is more likely to happen. There is a probability of the incentive compatibility constraint violated when people happen to be more likely to be early consumers. Then banks may not have sufficient liquidity to demand the excess demand in the market. Banks know this probability; however, they may accept such a probability due to their maximizing expected utility method. Therefore bankrun may happen. Both views suggest that bank run can be an equilibrium phenomenon. I personally more agree with the business cycle view.

Summary notes on paper on the relationship between the financial system and economic growth

I personally agree with Hassan, Sanchez and Yu (2011) that the financial system is necessary but not sufficient to guarantee a fast economic growth. As we can see from the past, before the 2007-08 financial crisis, the economists generally agreed that a larger financial system could generate higher economic growth, according to Schumpeter (1911) and King and Levine (1993). However, since the financial crisis, the economists' opinions have divided. Reinhert and Rogoff (2009) suggests that larger financial system could have a mixed outcome. Aghion (2010) thinks a larger system can alleviate liquidity constraints facilitating long-term investment and reduce the volatility. On the other hand, Cechetti and Kharroubi (2012) suggests a bigger system is bard for aggregate real growth and Blanchard and Labonne (2011) suggests that there is no clear relationship between the financial system and economic growth.