Tools Used in This Book

Abstract

This chapter introduces the two theoretical methods used in this book. The first method is time inconsistency in a dynamic environment that is developed by Kydland and Prescott (1977). Time inconsistency occurs when, in a dynamic environment, policy makers have incentives to deviate from their initial announcements. Here, the announcements are not credible to the agents, and called “inconsistent”. An example is the government flood control and people’s house building. The second method is signaling under incomplete information that is developed by Spence (1973, 1974). A sender has private information that is unobservable to others. He/she sends a message (signal) to a receiver. An example of private information and signals is workers’ productivity and their education. I overview these methods and prepare for Chaps. 2, 3, and 4, where these methods are applied to prize promotions, anonymous giving, and political advertisements.