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Eco 11-26 - quality or high quality 2 Consumer can only...

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Econ Notes 11/26/07 1. Economic Organization a. Firms i. Nature of Farms 1. Tragedy of the commons 2. British Navy a. Pre-Modern Britain b. Better Incentives for “good military behaviors c. Consider the General Environment at the time i. Captains were given basic control 1. ships were at the mercy of the winds d. Major Informational Asymmetry e. Captain had 2 incentives to fight i. Most likely to die in a conflict if boarded ii. Booty from commercial vessels f. British Solutions i. If they saw an enemy ship of the same class, then they must engage 1. Penalty was death 2. Lieutenants were appointed to monitor the actions of the captain 3. Observer monitored the lieutenant ii. Engage in the Gage Position 3. British Army a. Purchase System…why? i. To incentivize soldiers w/out monitoring ii. Problem…how to measure “leadership” 1. Engage purchase of commission 2. Pay officers very little 3. Permitted officer to receive booty from battle iii. Officers would self-select ii. Contracts and markets 1. Suppose we have a firm that can sell low
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Unformatted text preview: quality or high quality 2. Consumer can only tell the difference between the two once he gets home a. I.E. it is not immediately discernable 3. Suppose High Quality costs more to produce 4. Suppose all firms are price takers 5. We can graph the situation (High Quality vs. Low Quality) a. Firms are tempted to produce low quality at high prices i. Consumers become suspicious and no longer pay high quality prices b. Firms will end up only producing low quality goods at low quality prices c. We like to think that we see high quality goods all the time d. Firms will produce high quality and be truthful if present value of profit is greater than the one time profit level of selling a low quality good at high quality prices iii. Signaling 1. Brand Name a. A signal of quality b. Education i. Firms don’t know if candidate for a job is high-productive or low-productive ii....
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Eco 11-26 - quality or high quality 2 Consumer can only...

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