‫קורס‪ :‬סוגיות בכלכלת הפירמה – ‪57496‬‬
‫ת‪.‬ז‪XXXXXXX :‬‬
‫תרגיל ‪ :2‬רוג'רסון ובן בסט‬
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1a. One of the problem Rogerson explores in his article is the problem of Under Investment.
This problem arises in a monopsonistic market and causes to the firm to allocate less than
optimal resources to R&D, a problem that the US government dealt by funding specific projects,
as can be seen in Table 1. The DoD also uses some legal tools such as administrative guarantees
and ordering the contracting officers to not pursue the lowest price, but a fair one.
1b. Another topic we discussed in the class that also appears in the DoD weapons procurement
is Regulatory Lag. This phenomenon occurs when there is a wide time gap between the request
for a product and the delivery of same product. During this time the contractor can reduce costs
and boost profits without a time for the regulator to respond, hence a lag. The DoD, as a matter
if policy, embrace this prima faci problem to incentivize the contractors to reduce costs while in
other circumstances those revenue margins might get competed away.
1c. The issue of bounded rationality that leads to incomplete contracts, which are lacking clauses
about sudden changes in pries, creates a major problem to enforce contracts and forces many
renegotiations, even in fixed-price contracts. This situation creates Bilateral Monopoly
Negotiations, which are not optimal and prone to failures. The DoD doesn’t eliminate this
problem fully but tries reduces it by gathering as much information about the cost structure prior
to the contract.
2. Along the course we learned that under a situation in which the regulator doesn’t know the
firm's entire cost function, its best for him to set a price that will incentivize the firm to cut down
costs and gain profits. The committee decision to not differentiate the cost of water services was
blind to the changes in the terrain and the different price that follows such circumstances. Along
that, the decision maid efficient firm pay more for water than inefficient firms, which
completely disregards the importance of incentivizing efficiency.
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