Econ 174 Discussion Questions

Coase Discussion Questions.

• According to Coase, what distinguishes transactions within firms from transactions across markets?

• Why might using the price mechanism to coordinate economic activities be costly?

• According to Coase, what determines firms' size and/or scope?

Alchian and Demsetz Discussion Questions.

• Alchian and Demsetz claim that employer-employee relationships are no different than relationships between consumers and their grocers. In what sense? Is this really true?

• What role do labor markets play in Alchian and Demsetz' theory of the firm?

• Non-separabilities are important to A&D's theory. What are non-separabilities? Do non-separabilities alone explain why firms arise?

Jensen and Meckling Discussion Questions

• What is the research question? What is the main issue that the authors investigate?

• What are agency costs in this paper?

• Why do the managers in Jensen and Meckling's model have an incentive to devise means to align their incentives with those of shareholders?

• Why might managers' incentives diverge from those of debtholders?

• What determines firms' ownership structure in Jensen and Meckling's model?

Takeover Discussion Questions

• How does the prospect of hostile takeovers affect the behavior of firms' existing managment?

• What limits outsiders' incentives to undertake hostile takeovers?

• What are "golden parachutes"? Do the authors of these articles view these as efficiency-decreasing or efficiency-increasing?

Preparing for the McDonald's Case

The goal of this is to apply what you have learned so far in class, particularly the material about incentive contracting, to a real-world situation. This case ("Big Mac's Pay Plans", in the APS reader) is over twenty years old, but it serves as a good platform for discussion. It is one of the best known business cases ever published.

Prepare however you wish. You are allowed to prepare with others in the class if you wish. What I recommend is that you read the case through thoroughly a couple of times, jotting down the details of each of the alternative compensation schemes. Then think about the advantages and disadvantages of each, applying the principles of incentive contracting that we covered in class. These principles are also in Milgrom and Roberts, Chapter 7. Before constructing your analysis, it is extremely useful to determine the answers to the following questions:

• What, exactly, do managers have in their direct control? What specific tasks?

• What can they monitor at fairly low cost?

• What do managers at company-owned outlets not control that managers at stand-alone restaurants do?

• What factors affecting outlets' profitability are generally outside of managers' control?

You are expected to thoroughly prepare for this discussion. Prepare as if you each worked for a consulting firm (specializing in executive compensation) hired to advise me. Firms expect their consultants to provide answers to any relevant question they ask; I expect the same from you. You need not memorize all of the details of the case -- this is not a trivia contest -- but you are expected to provide sound analysis when called upon.

Klein, Crawford, and Alchian Discussion Questions

• What is the research question? What is the main issue that the authors investigate?

• What determines the extent to which an asset is specialized? Provide two examples -- examples we have not mentioned in class or seen in readings -- of specialized assets.

• How are rents and quasi-rents different?

• What form of opportunism do the authors discuss?

• What inefficiencies arise as a result of this opportunism?

• What is ownership, according to Hart? How does this differ from the theories we have previously seen?

• What delimits firms boundaries, according to Hart?

• How might reallocating residual control rights affect efficiency?

Chandler Discussion Questions (I)

• According to Chandler, in what industries did middle managers first appear? Why did they appear in these industries first and not others?

• What role do middle managers play? How do they add value?

• Why did new organizational forms (multidivisional firms) appear earlier in the United States than in other industrialized countries?

Chandler Discussion Questions (II)

• Chandler writes about "tripartite investments" which some firms made in the late 1800s and early 1900s. What were these investments, and why did the firms that made these investments become dominant in their industries?

• Why would these "tripartite investments" not have been successful in the early 1800s?

• The earlier Chandler piece you read emphasized the role of middle managers; this one investigates regularities which relate industries' technology, industry structure, and firms' scope. How are these related? That is, what role does management play in the ideas expressed in this paper?

Nelson and Winter Discussion Questions

• What are routines? What role do they play with respect to organizations?

• What determines the firm's scope of activities?

• Is this an incentive-free view of the firm? Do Nelson and Winter assume away principal-agent problems within organizations?

Milgrom and Roberts Discussion Questions

• What characterizes "modern manufacturing" and how does it differ from traditional production processes?

• What defines whether activities, or groups of activities, are complementary?

• What are non-convexities, and why do they make it more difficult to firm to reoptimize in light of changes in its environment (changes in input prices, changes in technology, etc.)?

Holmstrom and Milgrom Discussion Questions

You are responsible for the introduction (p. 201-3), and the empiricial evidence and conclusion (p. 216-9).

• Describe three or more types of incentive instruments that firms use to motivate individuals.

• Why are incentive instruments, in some circumstances, complementary?

• Shepard (1993) shows that service stations which offer repair services are more likely to be independently-owned than those which have convenience stores. Why might this be the case? Using Holmstrom and Milgrom's theory, how else would you expect the organizational features of service stations offering repair services and those with convenience stores to differ? Why?