90%(10)9 out of 10 people found this document helpful
This preview shows page 432 - 441 out of 444 pages.
*Adverse selection may also exist; a student who is willing to work for the wages the professor offers may be of too low a quality tocommand better offers elsewhere. But professors have other ways of finding out the quality of a student: how well the studentperformed in the professor’s courses, recommendations from colleagues, and so on.
*You think that is too many errors in all? Try writing a long and complicated book yourself.
†Perhaps it would have been better to pay $2 per error but then dock the student $10 for each one missed. Since the missed errors areonly discovered over time, that would require holding part of the payment in escrow, which might be more complicated than it is worth.When is the escrow released? Is there a maximum amount docked? Simplicity is a third constraint on incentive schemes. The peoplebeing incentivized need to understand how the system works.
*To fill out the analogy, imagine that the mechanic can “invent” a problem that brings him $1,000 of extra profits, which at a 10%interest rate is like an extra $100 per year. However, there is a 25 percent chance that you will catch him, in which case you will neverreturn to this garage. If your future business will bring in more than $400 of profit every year, then he would rather play it straight thanrisk losing your future business and the profits that go with it.
*Recall that a successful project is worth $200,000. Since the employee is paid a bonus of $100,000 for success, it is just as if theemployee owns half the business.
*Actually, this is what Barry wished he had done. It was 3:00 in the morning and much too much champagne had been drunk for him tohave been thinking this clearly. He bet £200 on the even numbers, figuring that he would end up in second place only in the event that helost and she won, the odds of which were approximately 5:1 in his favor. Of course 5:1 events sometimes happen, and this was one ofthose cases. She won.
*Unfortunately, it is not an equilibrium for Macy’s bid to succeed either, for in that case, the two-tiered bid would attract less than 50percent of the shares and so the price per share offered would be above the bid by Macy’s. Alas, this is one of those cases with noequilibrium. Finding a solution requires the use of randomized strategies, as discussed in chapter 5.
*Others have used the same ploy. Roald Amundsen started his journey of exploration to the South Pole using a trick; those who signedup did so in the belief that they were going on a long but much less risky voyage to the Arctic. He revealed his true objective only at thelast possible point of return, and offered a passage-paid return to Norway to anyone who did not want to continue. No one took him upon this, even though later there was much muttering: “Why did you say yes? If only you had answered no, I would have done the same”(Roland Huntford, The Last Place on Earth[New York: Modern Library, 1999], 289). Like Henry V, Amundsen was victorious and became the first man to stand on the geographicSouth Pole.
*AT&T (Cingular) is the exception to this practice.