Managerial Econmics Brickley, Smith, Zimmerman Chapter 10 Answers

Managerial Economics and Organizational Architecture

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Chapter 10 - Incentive Conflicts And Contracts CHAPTER 10 INCENTIVE CONFLICTS AND CONTRACTS CHAPTER SUMMARY This chapter provides an overview of incentive conflicts and contracting within firms. It begins by defining the firm as a focal point for a set of contracts. It then discusses the many incentive conflicts that exist between the parties that make up the firm. The role of contracts in reducing these conflicts is examined. The importance of asymmetric information in limiting the ability to solve these problems in a costless manner is stressed. Both postcontractual and precontractual information problems are examined. The role of implicit contracts and reputational concerns in reducing incentive conflicts is discussed. CHAPTER OUTLINE FIRMS Managerial Application—Enforceability of Implicit contracts INCENTIVE CONFLICTS IN FIRMS Owner-Manager Conflicts Choice of effort Perquisite taking Differential risk exposure Managerial Application—The Spectrum of Organizations Differential horizons Overinvestment Other Conflicts Managerial Application—Buyer-Supplier Conflicts Managerial Application—Experimental Evidence on Free-Rider Problems Managerial Application—Incentive Conflicts throughout the World CONTROLLING INCENTIVE PROBLEMS THROUGH CONTRACTS Costless Contracting Managerial Application—Jack Welch’s Perquisites Costly Contracting and Asymmetric Information Managerial Application—Agency Problems with Owner-Managers Postcontractual Information Problems Agency Problems Managerial Application—Pilots of Private Jets Example of Agency Costs Managerial Application—Technology to Reduce Monitoring Costs Managerial Application—Incentive Problems between Firms and Their Law Firms Precontractual Information Problems Bargaining Failures Adverse Selection 10-1
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Chapter 10 - Incentive Conflicts And Contracts Managerial Application—Rising Health Care Costs Create Employee Conflict IMPLICIT CONTRACTS AND REPUTATIONAL CONCERNS Implicit Contracts Managerial Application—Coke’s Implicit Contract Reputational Concerns Managerial Application—Corporate Scandal Affects Personal Reputations INCENTIVES TO ECONOMIZE ON CONTRACTING COSTS Managerial Application—Can the SEC Reduce Contracting Costs? SUMMARY TEACHING THE CHAPTER The incentive problem is represented using the utility-maximization framework initially presented in Chapter 2. Although it is likely students will remember the material well enough to understand the presentation of the material as it relates to this chapter, some students may need a brief review. One of the key points of the chapter is that incentives matter and the goal of a contract is to design an incentive system that will result in desirable outcomes. A second key point is that although in many of the analyses presented thus far the firm is considered to be a single actor, in reality, the firm’s actions are the aggregation of many individual decisions made by the employees of the firm. Properly structured contracts are an
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Managerial Econmics Brickley, Smith, Zimmerman Chapter 10 Answers

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