Market Lessons and Organizational Architecture, Group Decision Making - Edubirdie

University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

452

Pages:

2
Author:

Marcos Spence

APPLIED ECONOMICS FOR MANAGERS SESSION 17— I. REVIEW: STRATEGIC ISSUES INSIDE THE FIRM A. PRINCIPAL/AGENT PROBLEMS 1. SUPPLIERS/INPUTS HAVE PRIVATE INFORMATION a. ADVERSE SELECTION—CHIP SUPPLIERS b. MORAL HAZARD—LEGAL SERVICES 2. EXAMPLE: TOTAL BENEFIT OF LEGAL SERVICES: TB = 600L – L2 AVERAGE BENEFIT OF LEGAL SERVICES: AB = 600 – L MARGINAL BENEFIT OF LEGAL SERVICES: MB = 600 – 2L LAW FIRM: FEE OF $200 PER HOUR, GOAL IS TO MAXIMIZE BILLABLE HOURS IF CHOICE OF QUANTITY OF LEGAL SERVICES IS LEFT TO LAW FIRM: MAXIMIZE BILLABLE HOURS SUBJECT TO CONSTRAINT THAT TOTAL BENEFITS ≥ TOTAL COST 600L – L2 = 200L ⇒ 400 = L FIRM MAXIMIZATION OF NET BENEFITS: MB = MC = 200 ⇒ 600 – 2L = 200 ⇒ L = 200 $ TB 200 TC 400 MLAW GROUP’S EXPLOITATION OF ASYMMETRIC INFORMATION CAN HURT THE FIRM L B. COORDINATION PROBLEMS 1. COMPLEMENTARY INPUTS OR TEAMS 2. MULTIPLE NASH EQUILIBRIA C. TIME-CONSISTENCY AND FIRM SPECIFIC INVESTMENTS D. ALL OF THE ABOVE ARE ISSUES OF CONTRACT DESIGN— CONTRACTS MUST SOLVE 1. INCENTIVE ISSUES 2. PARTICIPATION CONSTRAINT II. WHO’S IN CHARGE? GROUP DECISION MAKING AND ECONOMIC OUTCOMES A. FREER TRADE IN FREDONIA B. INDIVIDUAL RATIONALITY VERSUS COLLECTIVE IRRATIONALITY C. STRATEGIC VOTING AND VOTE TRADING

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