Problem Set 3 -- Due Monday, November 18
1. Define residual control rights. What inefficiencies arise from a misallocation of residual control rights?
2. Fast food franchisors sometimes own the land upon which their franchisees' restaurants are built, and lease the land to the franchisees. How would franchisees' work and investment incentives (for example, investments in their own human capital) differ if instead a third party such as a bank owned the land? How would they differ if instead the franchisee owned the land?
3. A general principle of organizational design is to design institutions which encourage value-creating activities and discourage rent-seeking. In class, we used this idea to explain why Stanford University goes to great pains to have faculty offices be exactly the same. What is the nature of rent-seeking in this case and why is it inefficient?
Suppose offices were not all the same, but were allocated by means of an auction. Would this system encourage activities that are privately optimal but are socially wasteful? If so, describe them, and describe how one might discourage such activities. If not, explain why not.
4. When UCLA hires new assistant professors, the employment relationship is covered by renewable two-year contracts which contain no explicit performance incentives. (For example, we do not receive commissions on the basis of how many articles we publish, teaching ratings, etc.) At the end of the second and fourth year, each assistant professor receives a formal review of his or her teaching and research, and if evaluations are satisfactory, they may receive a raise. At the end of the sixth year, assistant professors come up for tenure. Those who do not receive tenure are not offered new contracts with UCLA; they must find another job, either at another school or outside academia. Those who do receive tenure are offered new contracts. Only about 15-20% of assistant professors receive tenure offers.
Assuming that UCLA wishes its assistant professors to work rather than shirk, how must it set salaries with respect to their next best opportunities? Will salaries change during the six year period? If so, how? If not, why not?
Suppose that UCLA can choose how much to monitor assistant professors' research and teaching, and that the marginal costs of monitoring are increasing with the level of monitoring. Will it behoove UCLA to monitor more toward the beginning or the end of the six year contract? Is this likely to differ across individual assistant professors? If so, how?
Not all courses offered at UCLA are offered at many other universities. Would you recommend that untenured faculty teach these courses? Explain why or why not.