All sessions together Flashcards
TOF Approach
Identify the coordination and cooperation (incentives, motivation) problems in each alternative.
Use this to reason about what is the best alternative.
“Best” = alternative that creates most value for the involved parties.
What are some coordination problems?
Team work more difficult to execute; challenges of sequencing work; greater need for formalization, advance planning; difficult to read facial, body language; harder to explain tasks to new hires; etc.
Division of labor between parties not clear, insufficient pre-planning, no procedures for reacting to disturbances, lack of communication, non-overlapping beliefs/culture, etc. → omitting important activities, incompatible activities, resource allocation, break-up …
What are some cooperation problems?
Shirking may become an issue b/c of greater difficulties of monitoring remote work (but remote could also make individual efforts more transparent). Less peer pressure.
Shirking, hold-up, undesired knowledge leaks, poaching of key employees, lack of trust, etc. → frictions, low investments, break-up …
What is a firm ?
“A firm is characterized by the employment contract, in which an employee accepts to take unspecified future orders (within limits) from an employer against payment – i.e., AUTHORITY.” Coase [emphasis added].
Why does the firm exist?
Discovering relevant prices (coordination).
Negotiating and concluding a separate contract for each exchange (cooperation).
Coordinating when tasks are uncertain.
The firm may avoid many of these costs.
(Firm) Optimum size (boundaries):
where the costs of organizing a transaction inside the firm = cost of organizing it using the price mechanism (market).
Q1: From the perspective of the TOF, managers
- Shape cultures.
- Install the core beliefs of the organization in employees.
- Solve specific motivation and coordination problems in a way that is superior to what markets can do.
- Solve specific motivation and coordination problems in a way that is superior to what markets can do.
Q2: Coordination is about avoiding free-riding, poaching of key employees, and the lack of trust.
True
False
False
Q3: The Theory of the Firms suggests that the division of labor should be maximized.
True
False
False
Q4: Coase suggested that the optimum size of the firm is determined by
A. Economies of scale.
B. The size of the market
C. The tradeoff between internal costs of organization and transaction costs in the market.
The tradeoff between internal costs of organization and transaction costs in the market.
Q5: Coordination problems in firms are primarily solved by means of incentives.
A. True
B. False
False
Q7: “Making” rather than “buying” (from the market) makes sense when
A. There are no platforms.
B. Making is less costly overall than buying.
C. The organizational costs of making are less than market transaction costs.
D. A and B
E. B and C.
E. B and C.
Q8: Outsourcing is almost always the best option.
A. True
B. False
False
Q9: The Theory of the Firm is about
A. All firms and their relations to other firms (and various stakeholders).
B. Successful firms mainly.
C. Corporations mainly.
A. All firms and their relations to other firms (and various stakeholders).
Q10: The theory of the firm is also about contracts between firms.
A. True
B. False.
true
Definition of a strategy in Game Theory
A specification of an action/choice for
each possible history/contingency/
situation which might occur.
Definition of Nash equilibrium
A payoff maximising strategy for each player, given the choice of strategy of other players.
How to sustain cooperation
-Between firms?
-Inside firms?
Between firms
Contract law, legal system, mediators/arbitrators, reputations, repeated interaction … that enforce contracts.
Inside firms:
Between employees, employers: Employment law, mediators/arbitrators, unions/employers’ associations, reputation, culture, repeated interaction.
Between organizational units: Fiat/authority, culture, repeated interaction.
What is imperfect enforcement?
These mechanisms help, but don’t work perfectly.
Reputation mechanisms are not perfect (think TrustPilot or Tripadvisor).
The legal system may be imperfect (slow, over-burdened, etc.), based on unfamiliar legal doctrine, or even corrupt.
What exactly happened in the dispute? Court may be asymmetrically informed; make ”wrong” decision.
Costly to make use of enforcement mechanisms (think corporate lawyers).
Improving outcomes by changing
Players—e.g., get rid of bad suppliers.
Payoffs—e.g., incentivize players to not choose ”bad” strategies (e.g., pay your employees more than what the rivals pay).
Choices—e.g., job descriptions (e.g., multi-tasking may have advantages, but also drawbacks …).
Information—e.g., management information systems, financial control, activity-based costing, benchmarking …
Interaction—e.g., repeated interaction often better than one-shot interaction.
Bounded rationality
humans have inherent cognitive limitations
Heuristics help
intuition, heuristics, rule of thumbs, etc. are useful.
Biases
Decision-making errors.
Q1: Nash equilibrium requires that there are “many” players.
True
False
False