ECON 262 Using the Model

ECON 262 - Handout

Examples of Using the R-I-A-O Model

To analyze a change in a rule or institution, economists use the following model:

Rules – Incentives – Actions – Outcomes

The rules or institutions in society create incentives for people - they change the costs and/or benefits of doing something (given that people act purposefully). These individual actions then will create noticeable outcomes in society.

Example One: Increasing the minimum wage (a rule regarding the contract that employers and employees make with each other).

Intended Outcome: Higher pay for low skilled workers.

Rule or Institution Change	Incentives (cost or benefit change)	Actions	Intended Outcome
An increase in the Minimum Wage.	This rule change increases the benefit to low skilled workers of working (i.e., higher pay).	Therefore, more low skilled workers continue working at the jobs they have or try to find jobs.	Those that are employed in low skilled jobs have higher monetary pay.

Unintended Outcomes: Higher Unemployment, Fewer Non-monetary benefits, more technology to replace workers, and the list goes on and on.

Rule or Institution Change	Incentives (cost or benefit change)	Actions	Unintended Outcome
An increase in the Minimum Wage	This rule change increases the cost of hiring people for employers.	Therefore, employers will hire fewer people.	An increase in unemployment.

Rule or Institution Change	Incentives (cost or benefit change)	Actions	Unintended Outcome
An increase in the Minimum Wage	This rule change increases the cost of hiring people for employers.	Therefore, employers will cut costs in other ways other than monetary wages.	A decrease in employer offered benefits.

Rule or Institution Change	Incentives (cost or benefit change)	Actions	Unintended Outcome
An increase in the Minimum Wage	This rule change increases the cost of hiring people for employers.	Therefore, employers will use cheaper ways of producing goods and services – including replacing workers with technology.	An increase in unemployment.

Example Two: Drug laws (a rule that makes buying and selling certain drugs illegal – with penalties of jail time and/or monetary fines).

Intended Outcomes: Less drug use, therefore less crime and better health within society.

Rule or Institution Change	Incentives (cost or benefit change)	Actions	Intended Outcome
Outlawing trade in certain drugs.	This rule change increases the cost (potential) of buying and/or selling certain drugs.	People buy and/or sell fewer illegal drugs.	Less drug use, better health, etc.

Unintended Outcomes: Higher violent crime rates, more overdosing of illegal drugs, and the list goes on and on.

Rule or Institution Change	Incentives (cost or benefit change)	Actions	Unintended Outcome
Outlawing trade in certain drugs.	This rule change increases the cost of reporting a “bad deal” when buying and/or selling drugs (which still takes place even with the law in place).	People who buy and/or sell illegal drugs take contract enforcement into their own hands by harming those who have engaged in a “bad deal” with them.	An increase in violent crime.