Problem Set 3 -- Due Monday, May 24
1.. In order to attract candidates from liberal arts universities without
formal accounting majors, the big six accounting firms run a special program
in conjunction with New York University's Stern School of Business. Liberal
arts majors who are hired must attend school during summers and at night
for two years. The employee must pay for this schooling; assume that it
costs $5,000. After they finish their courses, employees take the CPA exam.
During they time they are going to school (and working), employees are
Classes are composed entirely of new employees of big six accounting
firms. Because they are in the midst of receiving exactly the same training,
it is common for new employees to switch firms during their first two years.
Effectively, each of these trainees always has the opportunity to switch
to a different big six accounting firm and be paid $35,000/year.
During March of my senior year at school, my two most attractive offers
were from a big six accounting firm and an economics consulting firm. The
big six accounting firm's offer is described above. The economic consulting
firm's offer was $25,000/year. Assume that the consulting firm has a policy
of not hiring anyone who has ever worked at an accounting firm (it is extremely
costly to retrain accountants to do good economic analysis). My next best
opportunity was earning $22,000/year at a health care management firm in
New York. This offer would stay open for the foreseeable future, and it
would remain better than any other opportunity.
Assume that I care only about my net income. I therefore choose to work
at the accounting firm. How much, if anything, of my starting salary can
be considered an economic rent? How much, if anything, of my starting salary
can be considered a quasi-rent? Do there exist appropriable specialized
quasi-rents? If so, how much? If not, why not? Is there a hold-up problem?
Suppose the accounting firms get tired of turnover among their new employees,
and announce a policy of not hiring trainees away from each other. Does
this change the answers to the above questions? Explain.
2. Firms use various types of trailers when
hauling goods by truck. Two examples are "basic vans" and "grain
bodies." Basic vans are used to haul general freight: goods which
are packaged in boxes and which are not temperature-sensitive. (These
are the familiar box-like trailers you see on the road.) Grain bodies
are trailers which have no top, but have sides which are reinforced by
layers of steel that can withstand large amounts of pressure from inside.
To what degree are basic vans specific to uses? To users?
Hubbard (1998) finds that nationwide, about 35% of hauls which use basic
vans are completed by private fleets -- circumstances where manufacturers,
distributors, retailers, etc., haul their own goods. The rest are
completed by for-hire trucking firms. In contrast, 75% of hauls which
use grain bodies are completed by private fleets; only 25% are completed
by for-hire fleets.
To what degree are grain bodies specific to uses? To users?
Further research indicates that 55% of hauls which use grain bodies in
Iowa are completed by for-hire trucking firms, but 5% of hauls which use
grain bodies in Oregon do.
Interpret these facts in light of one or more of the theories presented
in class and/or in the readings. You may either do so by outlining
a theory which explains the facts, or by explaining
why the facts are inconsistent with the theories we have encountered.
Is this a surprise, in light of what we have discussed in class?
Why or why not?
3. When one firm purchases another, it often justifies the
purchase by claiming that there exist "synergies" -- that somehow the value
of the merged firm is higher than the sum of the values of the two firm
given separate ownership.
What happens when firms merge, according to Hart? That is, what is
the difference between a merger and contracting?
According to Hart's theory, what must be true for a merger to be value-increasing?
(It may be easier to start by stating the conditions under which a merger
cannot be value-increasing.)
4. Using efficiency wage theory, explain why the salary
of a 60-year old executives might be higher than the salary of 45-year-old
executives who are equally talented and knowledgeable and whose outside
opportunities are exactly the same.
Does efficiency wage theory provide a coherent explanation for why compensation
generally increases with age for salaried workers? Why or why not?