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CONCLUSION

To conclude this book we will summarise the most important findings offered by the generalization of standard microeconomics, which replaces the profit criterion with the more general maximization of the Pareto probability of economic survival.

The scope of the issues that can be modelled thanks to such generalization is in our view remarkable. We have been moving in areas that are beyond the range of standard microeconomics based on the homo economicus paradigm: the behaviour of a firm in a centrally planned economy with an anti-efficient economic climate; an economy with widespread corporate insolvency; the optimum in a sector showing increasing returns to scale; the market allocation of externalities; the economic behaviour of agents in the non-profit university sector; and altruism and rational redistribution from the microeconomic perspective. In addition, generalization of the criterion function gives us a nonstandard and deeper perspective on certain problems that are dealt with by standard microeconomics, such as risk modelling and risk aversion and the principal-agent problem (moral hazard and adverse selection]

In Chapter 1 we for mulated the general microeconomic criterion in terms of maximization of the probability of survival. We noted that the assumption that the probability of survival is directly proportional to the margin relative to the subsistence level (i.e. the boundary of the zone of certain extinction) is consistent with a first-order Pareto probability distribution. In this way we solved the problem of construction of the cardinal utility function for non-profit agents and for agents that have other criteria besides the profit criterion.

Chapter 2, dealing with risk modelling and hedging against risk, offered a non-traditional look at the traditional St Petersburg paradox. The results generated by the model are intuitively more acceptable than both the 250-year-old explanation of this paradox by Daniel Bernoulli and the more than 50-year-old explanation of von Neumann. In our opinion these explanations had not previously been surpassed. The generalized economics approach also inspired us to introduce a new category of "situational risk attraction” — agents can be forced by their situation to take risks (even if they are risk averse "by nature”) because only by doing so do they have at least a non-zero probability of avoiding otherwise inevitable economic extinction.

The generalization of economic agents' criterion to maximization of the probability of survival subject to certain conditions guarantees the existence of market equilibrium even in cases where standard microeconomics with agents maximizing the utility of expected income rules out such equilibrium. This we proved in Chapter 3. Generalization of the profit criterion allowed us to model decision-making with two criteria (the utility of a principal and the utility of an agent). This is particularly useful in the case where certain entities knowingly affect the prosperity of other entities or where the economic extinction of one entity can threaten the survival of other entities. We arrived at the conclusion that given the assumption of maximization of the probability of survival, the problems associated with information asymmetry in principal-agent models are weaker than in a standard economic climate of entities maximizing their expected profit, because the principal and the agent are not in a fully antagonistic relationship. If the survival of the agent is contingent on the survival of the principal, the problem of adverse selection disappears. The problem of moral hazard also decreases: under certain (not unrealistic) conditions, an agent will voluntarily spend to reduce his level of risk. We consider it proven that generalized microeconomics offers a more realistic view than "anonymous" profit maximization for many principal-agent problems.

The methodological approach of generalized microeconomic theory also proved very successful in insurance decision-making models, as dealt with in Chapter 4. Maximization of the probability of survival allowed us to model the fact that the agent s economic situation is the key factor for his insurance decision (and consequently for his insurance demand function). Agents with extremely high income will reject insurance (as an unfair game). However, agents with extremely low income will not buy insurance either, because if they did they would have to for go other, more necessary consumer goods. The existing standard models with maximization of expected utility (von Neumann) and the best-known non-standard model (Kahneman-Tversky) capture this tendency which occurs in the real economy either not at all or only partially.

Chapter 5 examines economic rationality in the non-profit sector using the example of universities. Here we summarize the results of an analysis of the consequences of various university funding modalities. We assume that every university at every stage maximizes its probability of survival, which is threatened by low income and loss of accreditation due to teachers quitting for better paid jobs. The control variables are the tuition fee and teachers' pay. An excessively high tuition fee deters students, whereas an unnecessarily low tuition fee represents an opportunity cost, thereby worsening the university's economic position. Likewise, unnecessarily high lecturers' pay endangers the university's financial situation, while excessively low pay increases the likelihood of lecturers quitting and the likelihood of loss of accreditation. In simulation experiments, we compared the impacts of various funding modalities (tuition fees only, a combination of tuition fees and subsidies, and no tuition fees, i.e. state subsidies only) on the behaviour and existential threat of the university and on the overall efficiency of the system (the number of study applicants satisfied, demand for teachers, the tuition fee and teachers' pay). In the final section of the chapter we derived the shape of the supply function for a university maximizing its probability of survival, i.e. the relation between the number of students and marginal revenue.

In Chapter 6 we present the homo se assecurans model, the first version of which was constructed by the co-author of this book in the late 1980s. The producer's criterion there was maximization of the (absolute) reserve against the plan constraint. In our book we modify this model in such a way that the producer maximizes the relative reserve, in line with the other chapters. Both versions of the homo se assecurans model (in contrast to standard microeconomics) allow us to describe the situation where an economic agent prefers a production situation lying inside the production set (i.e. below the technological maximum). This situation was typical of centrally planned economies. The model lends support to the hypothesis of the unre formability of central planned economies in the sense of increasing their efficiency — even measures that would boost efficiency in a standard economic environment (such as "accommodative planning”) lead inevitably to a further reduction in the efficiency of the economy in the homo se assecurans environment. Nonetheless, the model shows that the behaviour of agents in centrally planned economies was rational, even though this pathological rationality was caused by the very nature of the communist economic system, where economic survival (company managers remaining in their posts) necessitates a completely different type of behaviour. Even this type of behaviour, however, can be modelled by generalized microeconomics, and the model offers deeper insight into the patterns of behaviour of economic agents and the economy as a whole.

The fact that an economically non-standard environment does not rule out rational economic decision-making of a kind is confirmed by Chapter 7. There we present a model of an economy with widespread corporate insolvency in which firms sell part of their output to "non-payers" at a higher price (thereby boosting their book profit and increasing their chances of getting a bank loan) and part of it to "payers" at a lower price (thereby acquiring funds for wages and other immediate payments). The model shows what a company (implicitly) seeking to maximize its probability of survival will do with its output and what its (economically rational) decision on how to split its output between payers and non-payers depends on.

Generalized microeconomics also allows us to model non-standard phenomena in the production sector of a standard market economy as shown in Chapter 8. Specific conditions in certain monopolistic or oligopolistic industries lead to a non-standard non-decreasing production function. This is phenomenon about which standard microeconomics can say nothing other than that the optimal scale of production tends to infinity. In reality, however, there are risks associated with the potential entry of a new competitor, which will force, say, a monopolistic producer to choose a compromise between higher profitability (which would allow a new competitor to pay the high entry costs) and a lower risk of losing its privileged market position.

Chapter 9 is devoted to models of market allocation of externalities, namely a model of the emissions permit market and a model allowing parties to negotiate compensation for a negative externality (the Coase theorem). Generalization of the Coase theorem for the case of agents maximizing their probability of economic survival revealed that both agents (the polluter and the injured party) will be better off under bargaining (the same as in the standard Coase theorem), but the amount of investment in environmental cleanup is not independent of the legal regime (unlike in the standard Coase theorem). We also examined the problem of the efficiency of acquiring and transferring information between agents bound by externalities where the survival of the information provider depends on the survival of another agent A noteworthy and relatively surprising conclusion is that the acquisition and transfer of information is advantageous for both agents even when the information effect is smaller than the information acquisition and transfer cost Even more remarkable is the fact that an increase in the information effect can paradoxically increase the size of the information (and thus also financial) support provided by the recipient of the externality.

In the final chapter, Chapter 10, we investigated the issues of redistribution and altruism. Even altruistic behaviour can be explained by maximization of the probability of survival, which is usually increased by a higher degree of redistribution. Achievement of the purpose of redistribution depends on the circumstances. Optimal redistribution depends not only on the decision-taker's criterion, but also on the amount of the shared resources. Situations arise where a marginal change in the key variable leads to a fundamental change in the optimal redistribution strategy. Despite the relatively complicated context, the generalized microeconomics approach allowed us to model this issue. For the criterion of a state donor we applied the second-order Pareto distribution, because the criterion of a politician is maximization of his probability of re- election, and that is decided by the rate of growth rather than the absolute level of the standard of living. We demonstrated how the setting of strict conditions for the use of a subsidy by the state reduces the efficiency of the subsidy.

The model of a profit-maximizing producer (the homo economicus paradigm) is a special case of the more general criterion of maximization of the Pareto probability of survival. Our approach, therefore, is a generalization of, not an alternative to, standard microeconomics. We feel it is a useful generalization, because it allows us for the first time to model decision-making in nonstandard situations and to capture economic rationality in non-profit sectors of the economy.

 
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