race to the bottom:

Critics of outsourcing and globalization describe as a “race to the bottom” the tendency for manufacturing processes to be moved to nations with low wages, and what the critics view as inadequate labor laws and environmental standards.

racism:

Racism is economic or personal discrimination based on the race or ethnic origin of an individual.

Rand, Ayn:

A Russian émigré, Ayn Rand (1905-1982) developed a philosophy she called “objectivism” closely akin to social Darwinism that rejected the idea that anyone had any obligation to ever provide aid to anyone else. Her ideas were expressed in numerous polemics and in three noteworthy novels, Anthem, The Fountainhead and Atlas Shrugged. Rand helped popularize the economic theories of Henry Hazlitt and Ludwig von Mises through her staunch advocacy of free markets and, at most, limited government.

random selection:

Random selection is an allocative mechanism that determines economic decisions by chance. Random selection is inefficient in most cases where a choice must be made; such as who is assigned to certain careers. A lottery is an example of random selection.

random walk:

A variable such as changes in the relative price of a good or financial instrument follows a “random walk” when no aspect of any subsequent change in the variable is systematically related to any previous changes in the variable. The random walk hypothesis for financial assets is based in the theory of efficient markets.

random walk:

A variable follows a random walk if

range:

The range is the y values of a function, or the interval (the difference between the highest and lowest values) over which a data set spreads. For instance, if the data were a census of world population, the range of ages might be from 1 minute to 118 years old (perhaps).

ratchet effect:

A ratchet effect is a process by which the response to a stimulus is extremely different in one direction than the response to the same stimulus in the opposite direction.  In the economic arena, for example, unions may be quick to fight for higher wages when the economy is booming but slow to agree to lower wages when the economy is in a recession. Government growth is often argued to illustrate a ratchet effect. See Keynesian government growth ratchet for discussion of this issue.

rate base:

The rate base is value of a regulated firm’s capital stock to which an acceptable, or fair, rate of return applies. Usually refers to a public utility, such as a provider of natural gas or electricity.

rate of return:

A rate of return is the annualized average size of the income stream per time period as a percentage of the dollar outlay for an investment.

rate of return regulation:

Rate of return regulation occurs when a government agency sets rates for such natural monopolies as natural gas or electric utilities with the goal of permitting the firm’s stockholders to earn only a normal rate of return, based on the riskiness of their investments. See also block pricing and natural monopoly.

rate risk:

People in banking use the term rate risk to refer to the potential decline in the value of a portfolio of fixed-rate loans or other fixed rate assets that would occur if interest rates increase. See also interest rate risk.

rate structure:

A rate structure is a list of prices and quantities combinations that apply for a good or service. Rate structures for utility companies are usually set by a governmental regulatory commission. Ideally, these rate structures are adjusted by the regulator so that total revenue exceeds operating costs and includes only a normal profit.

ration:

The verb “to ration” is a synonym for the verb “to allocate.” Allocative mechanisms are also called rationing devices, and include government, tradition, brute force, random selection, merit, queuing, and prices and markets.

rational choice:

A rational choice is a decision expected to be consistent with one’s goals (e.g., maximization of utility or profit), given the information available about alternatives. The assumption that people are rational is one of the foundations of standard economic theory. Rational choices are determined by opportunity costs—preferences, budgets, and relative prices. Contrast with cognitive psychology and arational preferences or irrational choices. See Information and Rational Choice

rational expectations:

The theory of rational expectations suggests that consumer and investor decisions affected by, e.g., government regulations, inflation, or changes in prices, will be based on the best information and forecasting models available. This theory concludes that competitive markets operate so efficiently that policy goals (e.g., low rates of unemployment or interest) inconsistent with market outcomes cannot be achieved, even in the short run, unless the timing and the effects of demand-management policies come as surprises to the public. In financial markets, the theory of rational expectations is known as the theory of efficient markets. See also adaptive expectations and static expectations.

rational ignorance:

Rational ignorance is a result of cost effective choices about how much information to pursue. Decision making based on perfect information is an unrealistic dream. Decision makers will search for information only as long as the expected benefit exceeds the expected cost and, thus, may choose to be rationally ignorant of much information. Click on the link for a look into the bewildering maze of choices in the market today and why we choose to be rationally ignorant. See Rational Political Ignorance

rationality:

One standard economic assumption about human behavior is rationality, which means that people are assumed to have logically consistent preferences, that they accurately perceive and then store and retrieve information relevant for optimizing such preferences, and that the cognitive processes that underpin their behavior are consistent with accomplishing their objectives. Contrast with anomalies. See Rational Self-Interest.

rationing device:

See allocative mechanism.

Reaganomics:

Reaganomics refers to the supply-side orientation of the policies of President Ronald Reagan, which entailed attempts to stimulate economic growth via deregulation, significant cuts in tax rates, and plans to reduce government spending. Income tax rates were cut by 30 percent during 1981-1983, but government spending grew throughput the Reagan Administration, and the federal budget deficit soared. Although Reaganomics was partially successful, the United States had been the world’s largest creditor nation in 1981 at the beginning of his administration, but the burden of soaring national debt made the U.S. the world’s largest debtor nation by 1988. See supply-side economics, trickle-down theory, and the Laffer curve, consider the absorption problem, and contrast with Rubinomics.

real balance effect:

The real balance effect is the based on the positive effect of falling prices on the purchasing power of money-denominated financial assets. An increase in the “real” money supply (the purchasing power of each dollar in the hands of the public) accompanies any decline in the price level, and thus was expected by Arthur C. Pigou [1877-1959] to result in an increase in spending. Pigou argued that, contrary to John Maynard Keynes, declining prices would inevitably increase “real” spending, and consequently, income and employment. The real balance effect is sometimes called the Pigou effect, and is central to the monetary theories of Milton Friedman, among others.

real business cycles:

Many new classical macroeconomists embrace the theory of real business cycles, which assumes (a) that external shocks do not emerge from erratic changes in aggregate demand, and (b) that shocks to aggregate supply are permanent, and do not merely represent temporary departures from long run trends for economic growth. These theorists reject active demand-management policies as ineffective and inefficient, and perceive changes in aggregate demand as affecting only the price level.

real exchange rates:

Real exchange rates are nominal exchange rates after adjustments for changes in the relative price levels of different countries. Efficient markets theory concludes that real exchange rates and nominal exchange rates will be identical if governments do not intervene in the markets for foreign exchange.

real GDP:

Real GDP is a country’s gross domestic product (measure of all goods and services in the economy during a period) after adjusting for changes in the price level. See also deflating and nominal GDP.

real money balances:

The purchasing power of the money a person holds is termed “real money balances” and is computed by dividing face values of money assets by the average price level (or, to adjust for scale, 1% of, e.g., the CPI).

real rate of interest:

The real rate of interest is the annual percentage premium of purchasing power paid by a borrower to a lender for the use of money. The supply of saving is determined by the amount of extra goods, expressed in percentage terms, that can be enjoyed if consumption is delayed; and investors’ demands for the loanable funds saved is investment are determined by the rate of return expected form. The real rate of interest (ѓ) is computed by adjusting the nominal interest rate (i) for the rate of general price change [ѓ = i – Þ]. For more discussion, see the market for loanable funds.

real values:

Real values are the current dollar value of economic variables (e.g., wages, real estate, or gross domestic product) after adjustment for price level changes. See also deflating.

real wage:

The real wage is the purchasing power of the wage rate. The nominal wage rate must be adjusted for the price level to calculate the real wage rate.

real-income costs of inflation:

The real-income costs of inflation are the declines in standards of living resulting from inflation which causes reductions in productive and distributive efficiency.

recession:

A recession is a relatively moderate version of a depression. The National Bureau of Economic Research defines a recession to exist if there are two consecutive quarters of negative GDP growth.

recessionary gap:

A recessionary gap is the deficiency in autonomous expenditure in a Keynesian cross model that, if filled, would be multiplied so that full employment output was achieved. See also inflationary gap and GDP gap.

reciprocal:

Finding the reciprocal of a number entails converting the number to a fraction (e.g., 2 converts to 2 ∕ 1) and “flipping” it to exchange the numerator and denominator. For example, the reciprocal of 2 ∕ 3 is 3 ∕ 2, or 1.5.

reciprocity:

Reciprocity is an allocative mechanism in which the receipt of a “gift” (a good or service or favor) creates in the recipient a duty to reciprocate by providing a good or service or favor, normally to the original giver. The market system can be viewed as a subset of a reciprocity system, and usually entails a simultaneous quid pro quo exchange of items or services, or the exchange of money for an item or service.

recognition lag:

The recognition lag arises because policymakers’ perceptions about current economic conditions are clouded, and time and effort are required to gather, compile, process, and interpret data to gain some feeling for any widespread changes in economic activity; applies equally to both monetary and fiscal policies.

recovery:

The recovery phase of the business cycle lasts from a trough until overall economic activity returns to the level it reached at the previous peak.

recovery rule:

Investment decisions are sometimes naively based on a recovery rule, according to which a project will be undertaken if the firm anticipates that its initial costs are likely to be recouped recoup within a specified number of years (the recovery period), but the project will be rejected if this criteria is not met. While convenient, the recovery rule is seriously flawed: this criterion does not discount the project’s future cash flows, and it does not factor in cash flows received after the recovery period.

redistribution:

Redistribution occurs when (a) the ownership of non-human resources is reassigned or (b) income is taxed, usually by government, and conveyed from people who provide resources for production to other people, based on their perceived needs, or on attempts to achieve equity by at least somewhat equalizing income and wealth, or because the recipients are favored for some other reason by the entity in control of redistribution. See also special interest groups, vertical equity, horizontal equity, transfer payments, welfare, negative income tax, and property rights.

redlining:

Redlining refers to informal agreements that financial institutions will adhere to certain informal standards (heuristics) in extending loans or providing other financial services. When applied to real estate financing, redlining refers to denials of mortgage loans and banking services to people living in certain neighborhoods (a redlined neighborhood). This form of credit rationing violates anti-discrimination laws when based on race, ethnicity, or religion, and contributes to ‘environmental racism’. See also credit rationing.

reductionism:

The term reductionism is usually used pejoratively to suggest that a causal model is oversimplified and that it consequently ignores numerous factors, especially human sensibilities and behaviors, which may be germane for understanding the specific events being analyzed or discussed. In philosophy, belief that a complex system can be fully explained as interactions between the components of the system is commonly referred to as reductionism. See also abstraction.

reference dependence:

Reference dependence broadly refers to the contextual nature of people’s evaluations of their wellbeing. Subjective evaluations may hinge on an individual’s circumstances relative to the situations of other people, or on the direction of change in the individual’s circumstances. For example, people’s overall satisfaction seems to depend strongly on whether they perceive their circumstances as improving in quality or deteriorating, and not merely on the level of their wealth or income or consumption, as standard economic theory supposes. The idea that a person’s sense of wellbeing depends on the first derivative of their real income or wealth is known as the peak-end rule.

reflation:

Reflation refers to the increases in rates of growth of Aggregate Demand (e.g., faster monetary growth) in response to the tendencies towards recession that sometimes accompany attempts to reduce inflationary pressure.

reflection effect:

The reflection effect refers to research results from cognitive psychology that people are often risk averse when presented with alternatives with positive expected values, i.e. they tend to choose less risky alternatives, but they are risk seeking (risk loving or loss averse) when confronted by alternatives with equivalent but negative expected values; i.e., they tend to choose the riskier alternative. For example, an individual could play a bet in which the individual could win fifty dollars with a probability of seven-eighths or lose twenty dollars with a probability of one eighth. Thus, winning fifty dollars and losing twenty dollars are opposite in sign.  People exhibit a reflection effect if they are risk averse when presented with alternatives with the same positive expected values, i.e. they tend to choose less risky alternatives, but they are risk seeking (risk loving) when confronted by alternatives with the equivalent – but negative – expected values; i.e., they tend to choose the riskier alternative. See the prospect theory link for elaboration of this effect.

regional economic integration:

Regional economic integration occurs when neighboring groups of countries sign agreements and adopt common economic policies, which tear down trade barriers between the countries. The European Union is a major example of regional integration. All trade that occurs between the countries party to the agreement reduce barriers restricting trade and flows of labor and capital. Regional economic integration may be a small step towards free trade throughout the world.

regression fallacy:

The regression fallacy is the tendency to view sequential events as causally related even though no causal connection exists. See also post hoc ergo propter hoc fallacy, of which the regression fallacy is a variant.

regressive taxes:

Regressive taxes effective marginal tax rates that reduce the tax burden relative to income as income rises.

regulation:

Laws and regulations are legal mechanisms by which government controls resource allocations and the behavior of consumers and firms. Efficient regulation tends to increase real national income, but citizens often overpay for the benefits of inefficient regulations through reduced real income, without explicit tax increases.

Regulation D.

Regulation D is a federal law that limits the number of transfers businesses can make from interest-bearing transaction accounts to demand accounts. This severely reduces the amounts of interest that firms can receive from their bank deposits. Similar regulations limiting transfer activities by consumers have been rescinded.

Regulation Q:

Regulation Q is a federal law that prohibits the payment of interest on demand deposits. However, since 1987, banks have been permitted to pay interest on money market accounts, which are effectively demand deposits.

Regulation T:

Regulation T of the Securities and Exchange Act [1934] authorizes the Board of Governors of the Federal Reserve System to limit the amounts of credit that may be extended to investors in financial securities. The use of credit to buy securities is commonly termed “buying on margin.” Regulation T has been set at 50% of the value of the purchased securities for decades. See also margin requirements.

regulatory barriers:

Regulatory barriers are laws or government regulations that limit competition in a market. See also barriers to entry.

regulatory capture:

Regulatory capture refers to a regulatory environment in which a regulatory agency is dominated by the regulated industry so that the industry interest theory of regulation is reasonably accurate. A theory to explain regulatory capture was first elaborated by Nobel Prize winner George Stigler [1911-1994]. See also industry interest theory of regulation. Contrast with public interest theory of regulation.

regulatory risk:

The risk firms take that new laws or regulations might damage their business or shrink their profits is known as regulatory risk.

reindustrialization:

See industrial policy.

relative abundance:

Much of the theory of international trade focuses on the relative abundance of resources – the ratios of the productive resources available. For example, a nation with relatively large amounts of capital per worker (high K/L à low L/K) is described as abundantly endowed with capital , and nations with relatively little capital per worker (low K/L à high L/K) are described as abundantly endowed with labor. Open the link to Heckscher-Ohlin theory for elaboration.

relative income:

Relative income is a measure of the extent to which a person’s income diverges from median income for the country. Some analysts identify low relative income as half the average income in a population, high relative income as income that is twice the median income, and medium relative income as more than half but less than double the relevant population’s median income.

relative inflation:

Relative inflation occurs when the price level in one country increases faster than in a country with which it trades, stimulating increased imports into the country experiencing relative inflation, and declines in its exports. This imposes downward pressure on the exchange rate for the currency of the country experiencing relative inflation. See also exchange rates, nominal exchange rates, real exchange rates, specie-flow mechanism, and macroadjustments.

relative performance compensation:

Relative performance compensation is the difference in the wage rates of individual workers performing the same tasks based on managers’ perceptions of the workers relative diligence and productivity.

relative poverty:

People suffer from relative poverty (they are relatively impoverished) if the customary (average) standard of living in their society requires more spending than the income they have available. This standard changes as a society becomes more prosperous. For example, the standard of living average Americans experienced in 1900 was below the poverty threshold (guideline) estimated by the US Department of health and Human services in 2000. Open the link absolute and relative poverty for more discussion and see also absolute poverty.

relative price:

The relative price of a good is its price in terms of another good. Open the file relative and nominal prices for more discussion. See also absolute price.

relatively price elastic:

A good or resource is relatively price elastic in its demand (or supply) if the absolute value of the relevant elasticity coefficient is greater than 1 but less than infinity.

relatively price inelastic:

A good or resource is relatively price inelastic in its demand (or supply) if the absolute value of the relevant elasticity coefficient is greater than 0 but less than 1.

relatively uncontrollable outlays:

Relatively uncontrollable outlays can be thought of as uncontrollable government spending. These outlays cannot be changed without changes in federal laws, are often beyond administrative control, and involve contractual obligations. Examples include the pensions of retired federal employees and military personnel, Social Security, and other long term contracts of the federal government.

renewable resource:

A renewable resource is an item or substance that can potentially be regenerated at a rate that equals or exceeds current rate of usage or depletion. Examples include fish populations or timber, and potentially, potable water. In contrast, fossil fuels are nonrenewable resources because these depletable resources cannot be regenerated at rates comparable to the rates at which they are being extracted –regeneration of these biologically-based resources can take millions of years. See also depletable resources and contrast with non-renewable resources.

rent:

Rent is a payment per time period for the services of land. For an expanded discussion see also economic rent.

rental income:

The smallest major category of income in the National Income accounts is rental income, which is the sum of income from the leasing of land, houses, offices or any other kind of property or asset. This category is probably a huge understatement of the value of economic rent in an economy because of overly generous depreciation schedules imbedded in the Internal Revenue Service tax code. This category may also be more a return to investment in capital than as a payment for the use of land per se.

rent-seeking:

Rent-seeking is any attempt by a special interest group to shape public policies to its members’ advantage, even though such policies may impose excessive costs on the general public. The concept of rent-seeking was developed independently by Gordon Tullock and Anna Schwartz when each anlyzed the effects of barriers to international trade. See also quota rents.See Political Allocation

replacement cost:

Replacement costs are the costs that would be required to replace a current asset. Contrast with book value.

repo:

A repo (repurchase) agreement is a contract by which one party sells a security to another party and agrees to buy it back (“repurchase it”) on a specified date for a specified price. A repo is, in effect, a short-term collateralized loan from one financial institution to another. The excess of the price paid at the repurchase time over the price received at the initial sale point is interest.

representativeness:

Cognitive psychologists apply the term representativeness to certain types of stereotyping that leads to fallacious conclusions and bad decisions. High probability for an event leads to overestimates of the probability of a sequence of similar events. Generalization error is an example of the problem of representativeness, and entails expecting outcomes based on small samples to be the norm for much larger samples drawn across extended periods.

repurchase agreement:

See repo.

reputation building:

Reputation building is a strategy of developing an image that will change the behavior of people with whom an entity transacts. This often entails passing up short term gains in the expectation of larger gains in the longer run. For example, a retailer may try to build a reputation for fair dealing by adopting a generous return policy to accommodate dissatisfied customers. Or a worker may pass on an opportunity to shirk in hopes of a promotion, or to enhance job security in the event of a recession. Reputation building is also a strategy used by employers to offset shirking. A reputation for seldom laying off workers may attract more better-quality workers without requiring wage premiums.

reputational rent:

Reputational rent is any additional surplus of revenue over costs generated by a firm because of its reputation for quality, reliability, or honesty. Losses of reputational rent occur when, for example, a firm is involved in a scandal, as was the case for the Arthur Andersen, a major accounting firm which had been auditing Enron and verifying the reliability of its bookkeeping practices prior to Enron’s collapse.

required reserves:

Required reserves (RR) are the reserves that banks are legally required to hold against their deposits. See also legal reserves and excess reserves.

reregulation:

Reregulation occurs as a response to perceived negative consequences of deregulation, and reverses or refines some of the previous and recent deregulation.

resale price maintainance:

Resale price maintenance (RPM) occurs when a manufacturer and its distributors agree to set retail prices at a specific minimum or maximum price. The courts have repeatedly found retail price maintenance agreements to violate the Sherman Antitrust Acts of the United States, as amended.

research and development:

Pure research is the process of studying phenomena in a quest for new knowledge. Applied research is intended to find practical applications for the knowledge gained. Applied research and development (R&D) is intended to develop and implement new technologies.

reservation price:

A reservation price is the maximum price that a buyer is willing to pay for a given quantity of a good or the minimum amount that a seller will accept for a good or resource. See also demand price and supply price.

reservation wage:

A reservation wage is the lowest wage at which a worker will willingly supply labor to an employer.

reserve currency:

Reserve currency is foreign currency held as a country’s reserves.  For example, if China had the U.S. dollar and/or the Euro as part of its central bank’s (The People’s Bank of China) reserves, then that foreign money would be reserve currency.

reserve requirement ratio

The reserve requirement ratio (rr) is the fraction of a bank’s deposit liabilities that it legally must hold in reserves is the reserve requirement ratio.

reserves:

Reserves are the amounts of money held in a bank’s vault or on deposit at the Federal Reserve System to meet withdrawals of deposits or to comply with regulations.

residual risk:

See specific risk. Contrast with market risk.

resources:

Resources include land, labor, capital, and entrepreneurship. (Labor is increasingly decomposed into unskilled labor and human capital.) Alternatively, resources can be categorized as providing the knowledge (or technology) to apply energy to make goods or resources more valuable. Sometimes called factors of production or inputs. Click on the link for more information on the four kinds of resources.

restrictive practice:

A restrictive practice is any barrier, legal or otherwise, that inhibits free trade and market competition.

restructuring:

Restructuring refers to the reorganization of a company’s operations, and most commonly refers to cost cutting in the form of layoffs of employees or the sale of assets or operations acquired in a recent merger. Restructuring may occur because of pressure from a firm’s creditors who fear default, or from disgruntled stockholders. See also voluntary restructuring.

retail sales tax:

A retail sales tax (or simply, a sales tax) is an example of an ad valorem tax, and is a percentage tax that is typically broadly levied on the total revenues from the sales of most commodities and/or services.

retailer:

Retailers are intermediaries that buy from wholesalers or manufacturers and then sell these products directly to consumers. Retailers are at the end of the supply chain and include such firms as Wal-Mart and Best Buy.

retained earnings:

Retained earnings are the cumulations of corporate income kept by the corporation after paying corporate income taxes and dividends to the owners of common stock.

return on assets:

The return on assets is the percentage rate of return on the total value of a firm’s assets, and is mathematically certain to be a lower rate than the firm’s return on equity if the firm has nay liabilities, such as debt. See also leverage and return on equity.

return on equity:

The return on equity is the percentage rate of return on the firm’s net worth. See also return on assets.

revaluation:

In a system of fixed exchange rates, revaluation is an upward adjustment of an exchange rate for one currency, which logically necessitates a downward adjustment (devaluation) in the exchange rate of at least one other currency.

revealed preference:

A revealed preference model is a strategy for identifying people’s preferences by analyzing the choices they make as the relative prices of goods change. For example, the value people place on environmental quality might be inferred from changes in the values of nearby properties when a coal-powered electricity plant systematically increases or decreases its emissions of pollutants across time.

revenue neutral:

A change in tax structure is termed revenue neutral if the new tax structure yields the same tax revenue as would have the previous tax structure.

reverse engineering:

Reverse engineering is the process of developing a close substitute (or even a clone) for a competitor’s product by taking the competitor’s product apart to find out how it works, and then very carefully designing your firm’s product while trying to avoid obvious violations of intellectual property protection laws (e.g., patents or copyrights.).

reverse merger:

A reverse merger occurs when a private firm is acquired by a public company without any public offering of stock in the firm absorbed. This may happen when the stockholders of the private firm sell their private shares to the public company in exchange for shares in the public company. Reverse mergers are also known as reverse takeovers (RTOs), or back door listings.

Ricardian equivalence:

Ricardian equivalence (named for David Ricardo) is the theory that people will adjust so that whether government spending is financed by taxes or bonds is irrelevant. The fundamental conclusion is that the generation alive at the time of government spending bears the full burden of such spending in the form of reduced private purchasing power. This theory was resurrected in the 1970s by Robert Barro, but is decreasingly accepted because the burden of bond financing may be shifted by the generation that did the spending to people as yet unborn at the time of the spending. See also the concept of generational storm.

Ricardo, David

David Ricardo [1772-1823] developed: (a) the law of comparative advantage, (b) a theory of land rent based on relative agricultural productivity, a theory of the distribution of income (the iron law of wages) based on labor supply and land rents, (d) and a theory of government finance that suggested that the burden of government spending is not changed by whether the spending is financed by bonds or taxes.

right-to-work laws:

The Taft Hartley Act (1947) amended the Wagner Act (1935) and made certain labor union practices unfair, outlawed the closed shop, and permitted individual states to pass “right-to-work” laws that ban union shops.

rise ∕ run:

“Rise-over-run” is a shorthand formula for slope. Divide the rise (change in altitude) by the run (change in horizontal distance), and you’ve computed the slope of a function. See also slope.

risk:

Risk refers to the statistical distribution of alternative outcomes from an action, and is usually estimated by the variance, standard deviation, etc., of the possible outcomes (e.g., the probability of death plus the probability of living = 1.) If the probabilities of alternative outcomes are reasonably well known, a probability function can be constructed. In investment analysis, risk is commonly measured as the standard deviation of the expected return on total investment. Another example: An insurance actuary can estimate risks with reasonable precision if significant amounts of historical data are available, and then ascertain appropriate insurance premiums for bearing risk. See the link risk and uncertainty for more discussion. See also certainty, uncertainty, and Knightian uncertainty.

risk aversion:

Risk aversion refers to the relative willingness of people to choose alternatives with lower expected (probabilistic) values if their choices reduce uncertainty. Decision makers who exhibit this characteristic are termed risk averse. The extent of risk aversion is roughly measured by the expected value an economic agent is willing to forego to gain greater certainty. Risk-averse individuals are willing to make only bets that hold the prospect of loss (as opposed to merely holding onto their money) only if the bets are unfairly weighted in their favor. The assumption that people are consistently risk aversion is a workhorse of neoclassical utility theory, but research in the area of prospect theory increasingly calls this assumption into question.

risk aversion effect:

See snake bit effect.

risk bands:

Insurance companies develop categories called risk bands across which insurance rates are based on the payouts expected for the insured events. These risk bands are based on actuarial calculations, which usually consider such demographic characteristics of the insured as sex and age, or the region in which the insured resides. Phoenix has the highest rate of car theft in the USA. Thus, auto insurance premiums against theft are much higher in Phoenix than in, say, Stout, Wisconsin.

risk neutral:

Individuals are described as risk neutral if they are indifferent about risk and focus solely on the expected outcome of alternative choices. For example, a risk neutral individual will be indifferent between Proposition A, which entails a flip of a coin determining the gain or loss of $1, and Proposition B, which entails either gaining one dollar with probability of 999/1000 or losing $1,000 with probability 1/1000.

risk premium:

A risk premium exists when the interest rate on a risky debt instrument is increased, relative to a risk-free rate, by more than the minimum required mathematically to adjust for the likelihood of default. Arbitrage through diversification eliminates risk premiums for instruments traded in financial markets that are both deep and wide. Related terms include contingency clauses, default risk, exchange rate risk, inflationary risk, and Fisher effect.

risk seeking:

Individuals are described as risk seeking if they are willing to choose alternatives with lower expected (probabilistic) values in order to increase the possibilities of gain. Risk-seeking individuals, also known as risk lovers, are willing to make a bet that is unfairly weighted against them. A risk seeker will accept an expected payoff of less than X in preference to the certainty of X. Suppose, for example, that you have a dollar that is yours to keep if you don’t make a bet. If you were a risk seeker you might buy a $1 lottery ticket on which the odds of winning a million dollars were only 1 in 2 million. Behavioral economists have observed that individuals are often loss averse, which is, mathematically, risk seeking behavior intended to avoid losses.

risk structure of interest rates:

The risk structure of interest rates is a depiction of how interest rates on debt instruments vary with risk. The conventional wisdom is that, all else equal, interest rates and expected rates of return are usually positively related to the riskiness of an asset. However, the research of efficient markets theorists concludes that asset prices reflect zero risk premiums, being based instead solely on the scheduled timing and liquidity of and expectations about the income stream from the asset. See also term structure of interest rates and yield curve.

risk–free rate:

The risk-free rate is the rate of return, or yield, on a financial investment that has virtually no risk. An example of a relatively risk-free rate is the rate of return on a US Treasury bond that is within a day or two of maturity.

risky choice framing effect:

Risky choice framing effects occur when a choice has different appeal based on whether or not it is phrased in terms of potential losses or potential gains. Research by behavioral psychologists suggests that most people are more motivated to take a risk to avoid a loss than to achieve a gain. See also framing, attribute framing, goal framing, and prospect theory.

rival good:

A good is rival if consumption of a unit of the good by one individual exhausts that particular unit so that another individual cannot consume it. Apples are rival, but sunshine is normally nonrival.

rivalry:

Rivalry is a process in which individuals compete for gains or attempt to impose losses on other players in a game. (See game theory.) Rivalry and “competition” are distinct in economic jargon because many economists limit use of the word “competition” to refer to a particular market structure. See also pure competition and perfect competition. Click on the link for a comparison between competition and rivalry.

Robin Hood effect:

Named after Robin Hood’s “steal from the rich and give to the poor” mantra, this effect occurs when economic inequality is decreased due to the redistribution of wealth. Examples include progressive income taxes and affirmative action, both instances of people who are well off on average subsidizing people who, on average, are less well off.

Robinson, Joan

Joan Robinson [1903-1983] was the first notable female economic theorist, and was a pioneer, with E.H. Chamberlin, in the development of a theory of the behavior of firms that fell between the extremes of pure competition and pure monopoly. Her theories of oligopoly combined with Chamberlin’s theory of monopolistic competition to provide foundations for the structure-conduct-performance paradigm that dominated models of market behavior through much of the twentieth century.

Robinson-Patman Act:

The Robinson-Patman Act (1936) strengthened the Clayton Act’s (1914) limits on price discrimination, but permitted discounts if they could be justified by differences in costs of production or were introduced as “good faith” efforts to meet competition.

rotten kid theorem:

The rotten kid theorem is the expectation that even a child who would willingly experience a loss to increase the probability of a greater loss by a disliked sibling will act to increase the disliked sibling’s wellbeing if the children’s parents structure incentives to positively link the children’s fortunes or psychic wellbeing. For example, if parents’ wills will equalize their heirs’ wealth when the wills are executed, then each heir has consistent incentives to help the other heirs gain financially, and can be expected to urge the other heirs to save and invest. The rotten kid theorem is consistent with the idea that one decision maker (e.g., a child or a criminal) will intentionally harm another party (e.g., a sibling or a victim) only to the extent that the expected retaliation by the harmed party or the allies of the harmed party (e.g., parents or police officers) is less than the expected gain the decision maker from doing such harm. For example, an older child will punch a younger sibling only if the psychic gains expected from this aggression exceed the expected psychic losses associated with punishment expected from the parents. Nobel Prize winner Gary Becker’s writings on the economics of crime and punishment and on family economics were the foundations for the rotten kid theorem.

roundabout production:

Nineteenth-century Austrian economists investigated the link between saving and investment, and described capital accumulation as roundabout production.

Rubinomics:

Rubinomics (named after Robert Rubin, former President Clinton’s Secretary of the Treasury) is the view that economic growth is facilitated if the government balances its budget, thereby minimizing the increased interest rates and the “crowding-out” of investment that tends to occur if substantial government debt must be sold in financial markets. Rubinomics proved reasonably successful in the 1990s when, contrary to predictions by “supply-siders,” the economy grew robustly after federal taxes were raised significantly in 1993. See also the absorption problem, and contrast with supply-side economics and Reaganomics.

rule of 72:

The rule of 72 is a very crude rule of thumb used to roughly calculate the time required for some variable to double – divide 72 by the variable's percentage annual growth rate. This approach adjusts for discrete compounding each year (e.g., interest on interest). If compounding is continuous [compounded at every instant], the appropriate rule is roughly a rule of 69.

rule of law:

A rule of law prevails in a system governed by clear and well understood laws and regulations that are administered fairly, and where property rights are fully specified and protected, including the enforcement of contracts.

rule of reason:

The rule of reason approach to the Sherman Act (1890) permitted certain restrictive practices of a firm despite their anticompetitive effects if the firm could prove that its conduct was based on sound business practice and was secondary to its primary business practices.

run on the bank:

A run on the bank occurs when large numbers of depositors simultaneously try to withdraw their deposits during a financial crisis.  See also bank run and lender of last resort.