PowerPoint Slides © Michael R. Ward, UTA 2014
Econ 5313
Today
•
•
Syllabus
What the Course is About
•
•
What this Book is About
The One Lesson of Business
Econ 5313
Oil Lease Bidding
•
•
•
•
•
A young geologist was preparing a bid recommendation for an oil
tract in the Gulf of Mexico. His expertise and the information at hand
led him to recommend a bid of $5 million. Instead, a senior manager
bid $20 million - far over the next highest-bid of $750,000. What, if
anything, is wrong?
After winning the bid, the geologist increased the estimated reserves
of the company. But, after a dry well was drilled, the reserve
estimates were decreased. Would this have been inappropriate?
Then the senior manager stepped in and ordered an increase in the
reserve estimate. Why?
The senior manager collected a bonus based on increased value of
assets and resigned several months later. How does this help to
understand the situation?
How would you fix the problem?
Econ 5313
Insurance
•
•
•
Two similar surgeries are breast reconstruction and
breast augmentation. Breast augmentation is cosmetic
surgery not covered by health insurance. Patients who
want the surgery must pay for it themselves. Breast
reconstruction following breast removal due to cancer
is covered by insurance. What would you infer about
the prices of each? Why?
The price for the first has increased by about 10% each
year since 1995 while the other has increased by only
2% per year. Why?
Because it is easier to spend other people’s money.
Econ 5313
Daycare Pickup
A manger of a daycare center in Haifa, Israel has a
clearly stated policy that parents are supposed to pick
up their children by 4pm (16:00). But often parents are
late. Each week, there is an average of eight late
pickups. To combat tardiness, the manager of the
center instituted a fine of $3 per child per incident.
Surprisingly, the number of late pickups more than
doubled, to twenty per week. Why?
Econ 5313
Catching Shoplifters
•
•
•
•
•
•
An employee of Whole Foods in Ann Arbor, Michigan, was
fired in 2007 for apprehending a shoplifter.
More specifically, he was fired for touching a customer; even
though that customer had a backpack filled with stolen
groceries and was running away with them.
What incentives does this imply for would-be shoplifters?
Under what circumstances might this decision be efficient for
Whole Foods?
Under what circumstances might this decision be best for the
citizens of Ann Arbor?
Does Whole Foods have a social responsibility to stop
shoplifters?
Econ 5313
Going Green
•
•
•
In 2008, Exxon-Mobil shareholders fought off a
number of resolutions that appear to have
originated with the Rockefeller descendants. One
was a green resolution to "invest more profits in
alternative sources of energy."
What would be the likely effect of such an
amendment on shareholder wealth?
Suppose the CEO’s ex-felon brother-in-law were to
set up an alternative energy exploration firm. Should
the CEO direct investments there?
Econ 5313
Corporate Social Responsibility
•
•
•
“There is one and only one social responsibility of
business–to use its resources and engage in activities
designed to increase its profits so long as it stays within
the rules of the game, which is to say, engages in open
and free competition without deception or fraud."
Problems?
From Capitalism and Freedom, Milton Friedman
Econ 5313
From the Blog
•
•
•
Chapter 1
Market for Corporate Control
Being a Good Samartian
Econ 5313
Main Points
• Using the rational-actor paradigm helps to understand
behaviors.
• Try to picture the incentives of all actors involved in a decision.
• Good incentives are created by rewarding good performance.
• Design organizational structures so that employees have
enough information to make good decisions, and the incentive
to do so.
• You can analyze any problem by asking three questions: (1)
Who?; (2) Enough information?; and (3) Good incentives?
• Solutions are centered on changing : (1) decision rights; (2)
information flow; or (3) incentives.