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Test One Notes

Test One Notes - ClassNotes 16:20 II. Externalities...

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Class Notes 16:20 II. Externalities and Complementarities Externalities Pollution- negative Defn- one group affects another Education-positive  National defense- positive National Highway system- positive  Firms Quality- Pontiac Fiero  Firestone Low quality is a negative externality  High quality is a positive externality Solve the problem the same way Reputation McDonalds- Black and Deeker Sears Kenmore Learning Paychex o National Sales Office o Employees are learning about Paychex product through training on  product o Paychex is learning about employees skills o Internal job postings
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o Yamaha- motorcycles, outboards, snowmobiles, wave runners  Complementarities Go together- coffee/cream Office depot- printers/paper Solutions to Control Problems Coup= Salary + bonus (perf) Perf Evaluation 1. Observability 2. Absolute vs Relative PE i. Absolute Standard 1. Does not control for task difficulty ii. Ranking within a group(Relative) 1. Controls for task difficulty  3. Potential Problems with relative PE o Back stabbers- Sabotage other peoples performances 4. Group Performance i. Perf= f (individual, group, firm) ii. Free rider problem  iii. Peer review within groups iv. Need right of appeal  v. Brown nosing
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360 degree Perf Eval  Big Boss Boss Peers- Employees- Peers Dow Chemical                         % Individual                              .50 Plant                                     .20 Business group (product)        .20 Firm                                      .10                                             1.00 Solutions to Agency Problems     1. Ex ante incentives Stock/stock options Make managers part owners of firm Gives incentive to maximize value High level/ horizon 2. Deferral of bonuses 3. Ex Post PEC depends on performance works on all levels performance changes on each level Has ex ante effects
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4. Forcing (Penalty) Contracts only works with very simple tasks Works on two conditions o Observe actions o Know optional action 5. Horizon, effort Comp= salary+ bonus (perf) Risk aversion worse-pay a risk premium  Solutions to Exb and Complementarity Problems     Key is cooperation 1. PEC leg Joint compensation (only works at high levels) Direct (A, B)  F= A+B o Compensation of A= f (performance of A, performance of B) o Compensation of B= f ( performance of A, performance of B) Indirect o Compensation of A= f (performance of A, performance of F) o Compensation of B= f (performance of B, performance of F) 2.
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