Economics 174

Midterm, Fall 1996

There are four questions in this examination. Each is worth 25 points. The examination is 50 minutes long. It starts promptly at 11:00. You are allowed to work past 11:50 at a price of two points per minute. This provision is strictly enforced.

If you have any questions, I will be in or just outside the room.

Good luck!

1. According to Coase, what characterizes firms? Why aren't all transactions coordinated within firms?

2. According to the framework presented in class, when is it efficient not to pay a worker performance incentives at all? (That is, strictly on salary.)

3. Trucking firms have traditionally been unable to monitor their drivers very well, particularly those operating far from their home base. In the late 1980's, the computer hardware/software firm Qualcomm began to offer trucking firms a service which permitted them to better monitor their drivers. When trucking firms subscribed to this service, a satellite antenna was installed on individual trucks. Qualcomm tracked the location and speed of the trucks from their home base in San Diego. (Much like how air traffic controllers can track planes in flight.) Trucking firms could then connect to Qualcomm's computers to check the location and ground speed of each individual truck in their fleet.

Assume that individual truck drivers' utilities are decreasing in the extent to which they are monitored and that adoption only takes place when both drivers and their firms consent. Assume also no transaction costs and no wealth effects. Suppose adoption increases the total value when considering a firm and its drivers' interests.

Would you expect adoption to take place? Why or why not? Who would you expect to most strongly favor adoption, trucking firms or truck drivers?

4. What is bounded rationality? Why does bounded rationality lead to contracts which are less than fully-contingent? What incentive problems do such contracts sometimes create?