ECON 111 Notes

ECON 111 Notes - o Do we get strategic default...

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ECON 111 Notes- feb 3-2010 Midterm will cover up to today’s lecture and readings AIG and Bankruptcy- people still want their bonsuses o Said will cut 20 million in bonsuses, will distribute 100 million o Safe investment was efficient, unsafe investment was unefficent, but firm would chose risky investment because it has the possibility of saving the firm Financier vs. Entreprenuer o Project costs D in t=0, if it succeeds it will make R1, R2; Failure: 0, R2, o Liquidation value ( amount you can sell it for on the open market)=L in t=1, 0 in t=2. o P=probability of success o Contract: D’ in t=1, D in t=2 o Efficent? Succeeds: P(R1+R2-D)+ (1-P)(L-D)>0 Fails: R1-D’+R2>R1 (inefficient liquidation if failure occurs)
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Unformatted text preview: o Do we get strategic default? Entrepreneurs not paying for what they owe, even if they may do so o • Companies must report information to SEC • Two Models of Corporate pay: o Perks substitute for salary o Perks increase if the ownership is lower • Run a regression: cost of ceo’s private plane o Variables: CEO’s salary and CEO’s shares o Cost of CEO’s plane= a-b(Ceo salary)-c(% owned by CEO) + d (other variables) o If big negative for B= theory B rules, if big negative for C=theory A rules o B=-.001 ==says that extra salary does not have a severe change on the cost of the ceo’s plane==no on theory B o C= low as well, no support for either •...
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ECON 111 Notes - o Do we get strategic default...

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