Economics Chapter 15 Vocabulary Practice Answers

Contracts: Third party-enforceable agreements designed to facilitate deferred exchange Vertical requirements contract: A third-party enforceable agreement between stages of production in a product’s value chain Expectation damages: A remedy for breach of contract designed to elicit efficient precaution and efficient reliance on promises Frustration of purpose doctrine: An illustration of a default rule of contract law that can result in excusal of contract promises Spot market transaction: An instantaneous, one-time-only exchange of typically standardized goods between anonymous buyers and sellers Forward sales contracts: A consensual agreement to exchange goods delivered in the future for cash today, with no possibility of a performance excuse Incomplete information: Uncertain knowledge of payoffs, choices, and other factors Full contingent claims contract: An agreement about all possible future events Post-contractual opportunistic behavior: Actions that take advantage of a contract partner’s vulnerabilities and are not specifically prohibited by the terms Governance mechanisms: Processes to detect, resolve, and reduce post-contractual opportunism Moral hazard problem: A problem of post-contractual opportunism that arises from unverifiable or unobservable contract performance Benchmarking: A comparison of performance in similar jobs, firms, plants, divisions, and so forth Company audit: A governance mechanism for separating random disturbances from variation in unobservable effort Principal-agent problem: An incentives conflict in delegating decision-making authority Incentive compatibility constraint: An assurance of incentive alignment Participation constraint: An assurance of ongoing involvement Linear incentive contract: A linear combination of salary and profit sharing intended to align incentives Pooling equilibrium: A decision setting that elicits indistinguishable behavior Separating equilibrium: A decision setting that elicits distinguishable behavior Non-deployable specific assets: Assets whose replacement cost basis for value is substantially greater than their liquidation value Reliant assets: At least partially non-redeployable durable assets Relational contracts: Promissory agreements of coordinated performance among owners of highly interdependent assets Prospect theory: A basis for hypothesizing that the satisfaction from avoiding losses exceeds the anticipation of equal-value prospective gains Optimal mechanism design: An efficient procedure that creates incentives to motivate the desired behavioral outcome Stratified lottery: A randomized mechanism for allocating scarce capacity across demand segments English auctions: An ascending-price auction Dutch auctions: A descending-price auction Winner’s curse: Concern about over-paying as the highest bidder in an auction Common-value auction: Auction where bidders have identical valuations when information is complete Private-value auction: Auction where the bidders have different valuations even when information is complete Incentive-compatible revelation mechanism: A procedure for eliciting true revelation of privately held information from agents with competing interests Vickrey auction: An incentive-compatible revelation mechanism for eliciting sealed bids equal to private value Appraisals: An estimate of value by an independent expert Contingent payments: A fee schedule conditional on the outcome of uncertain future events Optimal incentives contract: An agreement about payoffs and penalties that creates appropriate incentives Self-enforcing reliance relationship: A non-contractual, mutually beneficial agreement Efficient contract breach: A set of incentive-compatible procedures for awarding expectation damages in breach-of-contract suits