finals Flashcards
offer competing explanation for the same observed behavior
moral hazard and adverse selection
a type of moral hazard caused by the difficulty or cost of monitoring employees behavior
shringking
refers to the reduced incentive to exercise case once you purchase insurance
moral hazard
arise from hidden information
adverse selection
arise from hidden action
moral hazard
specialized bank that borrow ftom depositor
saving and loans institution
ASI
auction services international
wants an agent to act on her behalf
principal
cost associated with moral hazard and adverse selection
agency cost
atlernative for reducing agency cost (3)
changing decision right
transferring information
changing incentives
arise in the normal course of business
incentive conflict
where the manager is evaluated on division profit/revenue
profit center
where the manager is evaluated on division average cost
cost center
is a contentious issues for almost any company
transfer pricing
conflict arise because two profit centers are each trying to extract profit from single profit
double markup or double marginalization
one in which various division perform separate task such as production and sale
functionality organized firm
one whose division perform all task necessary to serve customer of a particular product
M form firm
also used by carbargains
auction
bidders submit increasing bids
oral auction or english auction
lead to higher winning bids
stronger losing bidders
earn money by eliminating
cartel
OBSERVATION ABOUT RIG RIGGING (3)
•collusion is more likely small, frequent auction that in big infrequent ones
•collusion is more likely oral auction than in sealed bid auction
•collusion is more likely when winning bidders and winning bids are identified
(3) TO AVOID THE WINNER CURSE
- to avoid the winner curse you bid as if everyone else thinks the value is less than your estimate
- to avoid the winner curse you bid less aggressively as the number of bidder increase
- oral auction returns higher prices in a common value setting that sealed bid auction
IF COLLUSION IS SUSPECTED
- do not hold open auction
- do not hold small and frequent auction
- do not announce the winners and the winning bids
types of sealed bid auction in which bidder submit their bids without knowing the bids of other participants
vickrey auction or second price auction
second price auction is to bid exactly your value
optimal strategy
useful for auctioning off multiple unit
vickrey auction
highest bidders win the item
first price auction/ sealed bid first price auction
one of the most biggest challenges for an auctioneers
collusion/ bid rigging
prevented foreign supplies from bidding
domestic current rules
value is same for each bidder
common value auction
does not mean you lost money in an auction
winner curse
2 way to overcome obstacle
screening
signaling
the subject of this section
screening
the subject of next section
signaling
consumer values a lottery at it expected value
risk neutral
consumer values a lottery at less than its expected value
risk adverse
selection and protect your self against it
anticipate adverse
are not serve because it is difficult to transact
low risk consumer
represent a potentially profitable but unconsummated
adverse selection
describes the effort of the less informed party
screening
describes the effort of the more informed parties
signaling
can also serve as signals
advertising and branding
type of advertising the message of the advertisement less than the fact money
burning money
FDICO
federal deposit insurance corporation
ADVERSE SELECTION RESULTS (3)
- insurance companies and low risk consumer
- car buyer and seller with good cars
- employers and hardworking employees
can accomplish the same thing
exclusion
a manufacturer of perishable food may want her product kept fresh and at a controlled temperature
quality control
one example of incentive conflict in a vertical supply chain
double marginalization
similar incentive conflict between retailers and manufacturer
new product introduction
advertising, service, promotion activities and higher quality service can increase customer interest, awareness and sales
promotional activities
another reason why retailers do not find it profitable to engage in promotional activities
free riding among retailers
occur in supply chain because the same input is marked up multiple times
double marginalization problem
