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?

9 comments:

  1. In both books, what chapters and/or topics will be covered on the entire midterm?

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  2. The topics are bargaining, conflict in organizations and how to manage conflict, and the principal-agent model. In B&D this is chapter 8. In M&R this is middle of chapter 5, all of chapter 6, and some of chapter 7, which we will discuss on Monday. The exam is intended to emphasize an intuitive understanding of these issues, not a lot of math grinding through the models.

    Let me also point out that we had a homework on bargaining that went well beyond M&R and the content in that homework is certainly fair game. We did not have a homework on the principal-agent model but in our last class before the holiday there was a PowerPoint Presentation on the Principal-Agent model. And during that session I assured the class something from that session would be on the exam.

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  3. Is it okay to ask what "the process is competitive" implies explicitly in question A?

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  4. In question C, I am still unsure what "capture" means in this context. Where would I be able to find the answer to this question?

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  5. @Dale Jorgenson
    Competitive Process means that any organization out there can submit a proposal and selection is made by the quality of the proposal only, not by other considerations. As an analogy, you might think of an auction for a work of art. The object goes to the highest bidder and theory says the price will be the value of the next highest bidder. As I described in the excel Homework and discussed in class, the object in procurement is not as simple as a work of art. It is a package that can vary substantively from proposal to proposal, so which is the best package depends on how the RFP scores them and the subjective way the acquiring agency applies the RFP criteria to the proposals.

    &Elinor Ostrom - The expression capture comes specifically from the theory of regulation where it refers to the regulator ultimately doing what the regulated industry wants it to do rather than what the public believes it should be doing. However, I used the expression in class to fit any situation where an agent has a boss and also has clients and where the clients get the agent to do what the agent wants against the wishes of the boss.

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    1. A few typos in that response to Elinor Ostrom. It is the client getting the agent to do what the client wants against the wishes of the boss.

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  6. In the first essay, when you ask about the regulation of procurement by government agencies, is the discussion of the bank moral hazard enough to answer this part of the question?

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    1. Bank moral hazard doesn't come into play at all here. There is no investment activity going on by the government agency.

      There is a different sort of moral hazard in regard to favoring one of the companies that bids for reasons other than that the company produces the best product. There is perhaps an additional moral hazard - shirking if you will - that creates a bias against bidders that the agency is not familiar with and which it would have to do more homework to catch up on its product.

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