Management Midterm 2 Study Guide

Management Midterm 2 Study Guide - Management 100 Review...

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Ebay problems- Adverse selection when buyers cannot be sure about the condition of goods Moral hazard when winners walk away from bids Ebay solutions- Reputation mechanism, identity checks, insurance (only covers $200), escrow (too expensive) Debt financing- GENERIC assets. Faster. Should NOT be used with an irregular cash flow. Short-term: purpose of the loan is brief. Serves its purpose and is repaid. Like when inventory is sold or when costumers pay outstanding accounts. High monitoring. Retain all profits, decision rights. Long-term: purposes like major equipment purchases, acquisitions, expansion. Moderate monitoring, some constraints on decision rights, retain all profits. Equity financing- SPECIFIC assets. Do not expect immediate return. If company loses, no obligations to repay. Additional owners provide good advisors. Can increase credibility. One shareholder: moderate monitoring. Has decision rights, share in profits. Many shareholders: low monitoring because large amount of information, free- riding. Solution is to create the Board. Shareholders have power, but discpline is costly because of proxy battles, lack of information, social loafing. Can fix by tying their income to stock performance. A production externality exists when one worker’s effort influences another’s output. Kula Rings were traded to enforce status and authority. The more rings someone had, the more respect they earned. Governed by social norms. Expected that no one would hold onto the rings for too long. Barter did not develop because the exchange was not economical. It is a gift exchange, not a commodity exchange. However, some commodity exchange occurred in order to enter the Kula exchange. Four issues of a contract: what each is to do or not do. What will happen under certain contingencies. What happens if one fails to perform. A legally enforceable agreement. Problems- bounded rationality. Incomplete definitions. Businessman desire simple, no
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This note was uploaded on 04/07/2008 for the course MGT 100 taught by Professor Aharonson during the Spring '08 term at Washington University in St. Louis.

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Management Midterm 2 Study Guide - Management 100 Review...

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