ADEclass4_10-11_students - ORGANIZATIONAL ECONOMICS...

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Unformatted text preview: ORGANIZATIONAL ECONOMICS 2010-2011 Pablo Ruiz Verdú Session #4 Outline: Efficiency: examples and discussion Problem set 1, part 2 Review: No wealth effects and the Value Maximization Principle Efficiency: examples and discussion A firm has to decide how to distribute a bonus pool of 100 euros between two equally-deserving employees (Anne and Bob) . What is an efficient division of the 100 euros between Anne and Bob? Efficiency: fairness and multiplicity Problems with efficiency: There may be many Pareto efficient alternatives (example of Anne and Bob) problematic as positive criterion How to predict organizational choices when there are many efficient alternatives? Efficiency has little to do with fairness , justice,... (example of Anne and Bob) problematic as normative criterion Efficiency: examples and discussion Two firms, Oilspiller and Superpolluter, are considering a merger. There is no alternative that is preferred by both Oilspiller and Superpolluter to the merger. Is the merger efficient? Efficiency: efficient for whom? Problems with efficiency: Efficient for whom ? Efficiency depends on definition of group of individuals ( I ) An alternative may be efficient for the shareholders of two firms competing in the same market ... but not efficient if we also take consumers or the local community into account Problem set 1, part 2 3) Two biotech firms, a Spanish firm (firm 1) and an Indian one (firm 2), are considering the possibility of forming a “joint venture” to develop a drug against malaria. Indian regulation specifies that in any joint venture between an Indian and a foreign firm, the initial investment of the Indian partner should be at least 50% of the total investment, and the revenues resulting from the joint venture should be divided according to the contribution of each partnering firm to the initial investment. The expected cost and revenues of the joint venture are: Expected cost of the investment: 100 million euros Expected total revenue resulting from the investment: 150 million euros If the firms decide not to form the joint venture , the alternative option for them is to make the investment independently. In this case, the expected costs and revenues for each firm are as follows: Firm 1: Expected cost of the investment: 70 million euros Expected revenue of the investment: 100 million euros Firm 2: Expected cost of the investment: 50 million euros Expected revenue resulting from the investment: 60 million euros Problem set 1, part 2 Two biotech firms, a Spanish firm (firm 1) and an Indian one (firm 2), are considering the possibility of forming a “joint venture” to develop a drug against malaria. Indian regulation specifies that in any joint venture between an Indian and a foreign firm, the initial investment of the Indian partner should be at least 50% of the total investment, and the revenues resulting from the joint venture should be divided according to the contribution of each partnering firm to the initial investment. The expected cost and revenues of the to the contribution of each partnering firm to the initial investment....
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ADEclass4_10-11_students - ORGANIZATIONAL ECONOMICS...

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