Sunday, November 25, 2012

Upcoming Class Activities Sidebar Items Broken

The gadget for Blogger that I use for the upcoming class activities seems to be broken and Google recommends removing it from the blog.  So I did that.  You will instead have to go to the Class Calendar Tab to see the upcoming items.  I am sorry for the inconvenience.

Prof. Arvan

Friday, November 23, 2012

Candidate Essay Questions for Midterm 2

Welcome back.  I hope you had a refreshing holiday break.  We are now starting the last push until finals.  And with that on Monday we'll do a bit more on the principal-agent model from M&R chapter 7 - the quadratic version of the model, and then we'll have our review session for the next midterm, which is Wednesday.  Below are the candidate essay questions for the exam.

A.  This question concerns procurement.  Discus why in government agencies procurement is subject to  regulation.  What is the regulation aimed at preventing?  What does it try to accomplish?  Explain why during the bidding process the lowest price bidder may not be selected, although the process is competitive.  Discuss the various goals the agency conducting the procurement may have going into the process.

B.  This question concerns conflict in organizations and, in particular, Model 1 and Model 2 of Schon and Argyris.  Explain how a manager can without intending to do so cause the staff under him to be angry with his management approach.  What is it that causes their anger?  What are the consequences for the unit when the manager behaves this way?  Explain the Schon and Argyris recommendation about how the manager might diffuse the tension.  Why does their recommendation have a chance to be effective?

C.  This question concerns an agent who while performing the same function serves two different principals.  What are some examples where this situation emerges?  What problems are created that don't exist in the case where there is a single principal?  Explain what "capture" means and how it arises in this context.  What might be done to discourage capture?

Monday, November 12, 2012

Pay for performance......or not?

I thought it was  reasonably good session in class today, but I hurried a bit at the end.  So here are a few things to consider that I didn't get too.

(1)  One question is the frequency at which performance is measured.  You might consider that from the point of view of how the blogging is graded in our course.  An alternative to how we are doing that would be to have each post get a grade.  Is that alternative better or worse?  Can you explain why you feel that way?

(2)  A second question, related to the first, is whether the evaluation of performance has a direct impact on performance (the incentive  effect definitely exists  but lets call that an indirect effect).  The direct effect is due to the person feeling "on stage" and therefore less relaxed.  So thinking about it this way, a question is whether performance is better when the person is relaxed or better when the person feels on stage.  (The answer may depend on the person.)

(3)  A third question comes from noting that pay for performance provides extrinsic reward or punishment.  When there is intrinsic reward, meaning the person finds the work engaging for itself, what is the consequence of adding extrinsic reward on top of that?

These three questions are considered implicitly in this entertaining video - an animation with the voice of Daniel Pink.  I encourage you to watch it.   Then read my critique, because I don't think he gets the story quite right.

(4)  There is then the question when you have many people doing the same sort of work in an organization if you want to use performance pay as a way to differentiate them by their productivity, or if you instead want to pay them equally because most of the observed productivity differences can be attributed to measurement error and equal pay promotes an esprit de corps among these employees that itself provides a productivity boost.

This makes the consideration of pay for performance considerably more complex than the way I left it in class, but also considerably more interesting.

Sunday, November 11, 2012

Next two class sessions

Tomorrow we will start talking about moral hazard, the principal-agent problem as exemplar of moral hazard, and do so to get concepts out there and real examples considered. I plan to avoid using a PowerPoint in this session so we can get more interaction in class.

On Wednesday we'll do the math of the principal-agent problem in chapter six in M&R, introducing that with the insurance model, and moving from there.  We'll also do the S&L example from the book and talk about bank moral hazard in the presence of deposit insurance.  (The same sort of moral hazard may be present in a takeover financed by "junk bonds.")  We'll also do a brief discussion of the S&L crisis of the late 1980s and ask the question - why did history repeat only much worse in the financial markets in the 2000s.

I will use a PowerPoint for the Wednesday class so you can see the equations and work through the algebra.  I will not be giving out an Excel homework - it simply takes too long to write so there is some expediency in this approach.

I will guarantee now that something on Moral Hazard will be present on Midterm 2, so I hope you take this seriously in spite of the lack of Excel homework.

Friday, November 9, 2012

Grades Posted in Moodle

The Midterm 1 grades, Bonus, Blog Posts 1 grades, and comments are now uploaded into Moodle. (It's a day later than I promised.  Sorry about that. )

Let me make some observations about the blog posts, from the perspective of moral hazard, our next topic of study.  One type of moral hazard emerges by considering the difference between renters and owners, particularly in regard to the maintenance and depreciation of a capital asset.  Owners use of the asset is mindful of the impact use has on depreciation, so owners are typically gentle users of the asset. Renters, in contrast, are typically rough users since they have no concern for how the asset depreciates.  Similarly, owners perform all necessary maintenance and sometimes go well beyond that (tender loving care) while renters typically avoid the maintenance costs and pass those onto the absent owners.

These notions of ownership and renting transfer to individual behavior in organizations, where there is no tangible capital asset, only the value of organization membership, a non-tangible asset.  Sometimes we say a person "must take ownership" or "have skin in the game," which amounts to the same thing and means the behavior is driven by a strong sense of responsibility to the organization.  In contrast, a person who "dials it in" shows little apparent effort and in that sense is behaving like a renter.

How does ownership in the organization arise and what does it mean in practice to display ownership?  The latter has a particularly clear answer for group work that produces a document.  Each member plays a dual role, contributor of his or her section, and editor of the entire document.  It is via the editing function that ownership is displayed.  Note that editing is itself a negotiation between editor and author.  Friendly negotiation of this sort typically is in the form of the editor making comments and posing questions.  The author has ultimate say but  must address the questions and comments in a serious manner, in a way that is overt to the editor.

Because the topic was group work in one or two of the posts, the question arises whether students in our class have a sense of skin in the game in this context.  My take is that most do not.  The common practice is for a first draft to be produced quite near to when the final version is due.  Consequently, the editing function gets short shrift.

What about how this issue pertains to our class?  I am giving comments/questions to your posts like an editor would.  A few students have responded to these.  Most students have not.  In practice, having skin in the game is encouraged in a very soft way, making the organization feel like a community.  It is not typically incentivized by an explicit reward for the behavior.  The class is not yet a community.  Beyond the lack of response to my comments, student are not commenting on the posts by their classmates.

A more general observation about the posts is that most students are pretty good in relating what happened but are less good at explaining why it happened.  Each of you would benefit from giving more attention to the why questions in your posts.  You would get deeper into your topic that way.

Monday, November 5, 2012

Bargaining Homework

The Excel homework on Bargaining is now available.  The one short cut I took in making this is that the graphs are just there.  They are not dynamically generated as you answer the questions, as in the previous homeworks.  I thought it more important to get the thing up than to have this bit of slickness.

As you can tell from this post I am home and very happy to be here.  I will see you in class on Wednesday.  Please get the homework done before then.

Sunday, November 4, 2012

No class tomorrow (Monday). Class on Wednesday.

I am going home tomorrow, though I am not sure when. So I am canceling class for that reason. There will be class on Wednesday. The topic will be bargaining and procurement. If time permits we'll also begin our discussion of moral hazard from an informal/intuitive vantage. Though this is not a course document, I encourage you to read today this post, The Diffeq from Hell,, which is about the making of the Excel homework on Bargaining. I will commit here to have that homework up and available by tomorrow evening. I hope that you can get it done before class on Wednesday. I realize that is a short turnover. But under the circumstances, that is what makes sense so we can get back on track.

The procedure I had today went well and my prognosis is good. They got to this thing early enough that I believe things will be under control from here on out. It was quite a scare last week but now it is time for optimism.

My attire in class likely will change as a consequence --- casual casual instead of business casual. I'll explain why on Wednesday. Maybe some of you will respond by dressing up so the mean attire level in the room remains unaltered. ;-) And if there is candy left over I'll bring it then.

Prof. Arvan

Friday, November 2, 2012


First, let me apologize to the class for the cloud of uncertainty the situation with my shoulder has created in addition to the already missed classes. Here is what I know now about my health. But before that a word on my technology capabilities from the hospital.

I can post messages like this one (obviously) but I can' do it for a long time, because I'm connected to a bunch of wires and it is awkward to do.I don't have access to Excel here. So I can't finish and then post the now infamous homework on bargaining. Nor can I post the grades from midterm1 and from the first half of your blog posts. All of that can be taken care of, I hope in short order, once I return home.

I have an infection under my skin but so far above the shoulder. So it is bad, but it would be worse if it were in the shoulder. The treatment is to take antibiotic via IV and then with medicine applied locally to the shoulder. Every time they clean the area and apply new medicine locally, that is a trip to the OR. I have now had two of these with a third scheduled, probably for Sunday. I expect to go home after that, likely on Monday.

If once home, I can take a pill instead of the IV then I probably can teach class the rest of the semester. If I need to have an IV like thing at home, then I will be stuck at home. I'd prefer not to entertain that possibility at present. But you should be aware that it is possible, which would mean the class would turn into an online offering in some fashion as the only means to close out the semester.

I should know which of these possibilities will happen after the next trip to the OR and will post about that a few hours after it happens.

Again, let me apologize to the class for the uncertainty this situation has created. I know that none of you signed up for it.

Professor Arvan

Sent from my iPad

Thursday, November 1, 2012

In the meantime

Read chapter six in M&R on moral hazard.and the a static principal-agent model that is akin to the insurance model. Read chapter 7 as well which gives a quadratic version of the model.

We will then confront time-based approaches in chapter 8. This essay likely will be useful to you.

If you have trouble accessing it, then wait till I can post it in UofIBox.

I would say that class on Monday is unlikely, but I will continue to update as I learn more.

Sent from my iPad