Sunday, December 9, 2012

Candidate Essay Questions For Final

There will be six candidate questions below and three will be chosen from the six.  Two are new to you.  You haven't seen them before and are on the last portion of the course.  The other four you have seen.  These are the unassigned candidate questions from Midterm 1 and Midterm 2.
The New Questions:

A.  This concerns turnover, quite possibly efficient, in the setting of the repeated Prisoner's Dilemma.  One example can be seen in major college sports where the players have 4 years of eligibility.  They can play at most 4 years after which new players take their place.  For the very best players, who have the potential to play professionally, they may face a choice of foregoing a year or two of their college eligibility and turning pro early.  Consider this from the perspective of the coach.  Having such an excellent player on the roster increases the likelihood that the coach's team will win its games.  Discuss the incentives for the coach in advising the player to turn pro or not and in utilizing the player to showcase his skills in game situations to pro scouts.  Does the coach try to retain the player in making these decisions?  Why or why not?

Now consider a similar situation of how upper level management considers the professional development of rising middle management.  It is not unusual for middle management members to attend formal education aimed at executives, such as an Executive MBA program.  We think of such formal education as providing "general human capital."  Thus the education raises the productivity with the current employer but also increases the value of the employees outside option.  What criteria will upper level management use for selecting candidates for such formal education?  Will they be reluctant to send the very best middle managers to such programs for fear that they will lose these good personnel to other companies?  Why or why not?

B.  This question concerns innovative practice in the the setting of the repeated Prisoner's Dilemma.  Employees with some responsibility allocated to them may be quite diligent in doing their established work, so shirking per se is not an issue at all, but they may be very reluctant to try out new approaches for fear of being blamed when an experiment along those lines blows up in their faces.  There are various possible solutions to this issue:
     (i) provide large rewards for experiments that succeed,
     (ii) pool experiments across several employees each with some responsibility so responsibility is shared,
    (iii) punish work groups if they don't show innovation over time.
     (iv) possibly other mechanisms that might occur to you.

Discuss the pros and cons of each of these and discuss how the organization might come to a particular approach in trying to encourage organization members to be innovative.

Candidate Questions from Midterm 1

C.  This question concerns transfer prices.  Provide a working definition for what a transfer price is.  In a for-profit organization how should ownership (shareholders) want the transfer price to be set?  Explain why others in the organization might want the transfer price to be set differently.  What transfer price would these others like to see?  When service quality is jointly set with the transfer price, what service quality would ownership like to see?  Explain why this is the case.  Others may want a different service quality level.  Explain how their preferred service quality level differs from what ownership wants.

D.  This question concerns economic efficiency concepts.  There is a partial equilibrium concept and a general equilibrium concept.  Describe each of these.  Do the two concepts always coincide?  If not, under what additional assumptions do they coincide.  Provide an argument for why we should expect efficient outcomes.  Economic efficiency has been critiqued on several grounds. Explain some of these criticisms and provide settings where the particular critique appears valid.

Candidate Questions from Midterm 2

E. 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.

F. 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?


  1. In the Final Exam Question on efficiency can you please go into a little more detail about when partial and general equilibrium coincide? And can you explain briefly some reasons why efficient outcomes would be expected- is it enough to cite the efficiency principle and each individuals desire to maximize his/her utility enough? Thank you!

    1. When there are no income effects for all participants in the demand for a good, then income transfers don't impact the demand curve and the efficient output (where the social surplus is maximized) is independent of who receives the surplus. Similarly in the Edgeworth Box, if both consumers have preferences over bundles of (x,y) of the form uA(x) + y for consumer A and uB(x) + y for consumer B, then the demand for good x has no income effect and and the contract curve is vertical. Where it is vertical gives the efficient distribution of good x among the two consumers, A and B. Alternatively, the preferences for both consumers might look like x + vA(y) and x + vB(y) Then it is good y that has no income effects and the contract curve is horizontal at the efficient distribution of good y.

  2. With regards to the principal-agent problem, I'm not entirely sure what capture is and how it may arise. If someone can help get me started in the right direction that would be great. Thanks!

    1. Capture as an expression comes from the Chicago School talking about Regulation. The regulator may get capture by the party that is supposed to be regulated. In that particular instance if you think of the triangle as general public, regulator, and regulated industry, the regulator does what the industry wants, not what the public want. The notion can be applied to other triangles where the agents works for a boss, company, but also serves a client. Sometimes the client influences the agent and gets the agent to do things that the boss doesn't like. So we can call that capture even though it isn't in a regulatory context.

      One example to illustrate, this one should be in your answer on the exam, it is only meant to illustrate the problem, is that when a developer is doing a new software development, there typically will be trial users who have the software in alpha phase and beta phase and make suggestions for the development. Some of those suggestion are what the mass of what other users want. There is no issue with capture there. Other suggestions are unique to that user or only a small set of users want that feature. If the developer accommodates that use, it can hurt further development. Many software developments become too feature rich too quickly, for this very reason. Stability of the product suffers as a consequence.

    2. Incidentally, I meant this should NOT be in your answer on the exam since you're cribbing it from me. I must have been pretty tired typing the above. Lots of typos.

  3. For question B, part iv.

    Could promotions or increased share into the company's stock be an incentive to innovation? My thought process draws on Daniel Pink's TED talk and your blog response to it. Like you said, I am finding it difficult to preserve the bubble. Both mechanisms would keep the individual at the workplace, thus, increasing job security while also increasing growth and innovation, but of course the frequency of innovation would have to be seldom or modest because upper level positions and stock, to some degree, are limited.

    Also, this goes as question B as a whole, is innovation the sole job description of the employees or is it something they do on the side, so to speak.

  4. Taking this in reverse order, of course innovation is not the sole job. They've got a current service or product line. That must be delivered. Innovation is either to amplify or modify the product line or provide current services better or cheaper.

    Both promotion and giving stock can be incentive, sure. Those sort of things focus the mind. But let me take the promotion one here (and you see if you think through the stock one). Typically you can't promote all employees. Some get promoted others do not. That means that the promotion incentive is normally associated with some competition across the employees. If, however, innovation requires collaboration, then the incentive might come in conflict with the goal. That's the sort of thinking at root in the queston.