This exam has four questions. The first two count 15 points apiece. The third and fourth count 10 apiece. 50 points, 50 minutes. Allocate your time wisely.
This examination ends at 9:50. You may work past 9:50, but at a price of 2 points per minute. This rule will be strictly enforced.
If you have any questions please go out into the hall and ask me there.
Clear, concise, and correct answers are best. Think before you write. Good luck!
1. High yield ("junk") bonds were sometimes used to finance corporate takeovers during the 1980s. In class, I related the received wisdom that there was a relationship between the emergence of junk bonds and the fact that many large firms were subject to takeover bids. Junk bonds enabled small firms to obtain financing to take over much larger firms. Taking over such large firms is risky, and so-called investment grade bonds promised too low a return to finance such an enterprise.
This explanation, however, is incomplete. It does not explain why takeovers tended to be financed with junk bonds rather than through new equity issues. Firms engaged in takeovers could in principle do so by selling new shares.
2. A survey of cab drivers in LA reports the following phenomena. On average, drivers who own their own cabs pay their company 25% of the fares they receive. In contrast, drivers who drive cabs owned by their company are pay their company 75% of the fares they receive. The survey also reports that base wages tend to be higher for companies who drive company cabs than those who drive their own.
3. Define "complete contract."
4. Describe conditions whereby bargaining alone will necessarily lead to the implementation of efficient arrangements.