3 -- Due May 21, 1997
1. Define quasi-rents. Provide a real-world example of a situation where
quasi-rents exist. Under what circumstances would the quasi-rents in your
example be appropriable, and what incentive problems might this cause?
2. Attached find materials describing the new compensation
program in place at J.B. Hunt, one of the largest for-hire trucking
companies in America. Attached also is a press release
describing what has happened since the new compensation program went in
Several pieces of information will be useful to you. First, the two biggest
variable cost items on trucking firms' balance sheets are labor and fuel.
Second, "OTR" stands for "on the road" and the pay scale is in cents per
mile, where mileage is defined by the shortest distance between drivers'
origin and destination. Third, the "current random OTR" was their former
pay scale -- one that was about the same as most other trucking firms.
"2/25/97 Random OTR" is the new pay scale. Fourth, trucking firms have
been under increased pressure from shippers and receivers to pick up and
deliver loads on tighter schedules.
Different elements of this compensation program can be explained using
several different theories we have come across in class.
When answering these questions, feel free to make any additional assumptions
not in the article or the problem, but state them clearly.
What are J.B. Hunt's objectives? What are individual drivers' objectives?
How do they conflict?
What choices that drivers make influence the extent to which J.B. Hunt
achieves its objectives?
Describe the most important elements in the compensation program as
you see it. How do they align drivers' incentives with those of their firm?
Is J.B. Hunt using explicit performance incentives? Is it using efficiency
wages to provide incentives?
Do the different elements of this compensation program complement each
other? Why or why not? Do you see any specific problems with this plan?
If so, what are they?
3. According to Hart, what defines a firm? Using Hart's theory, explain
why GM faced a hold-up problem with Fisher Auto Body during the 1920s,
even though GM owned 60% of Fisher's shares. Also using Hart's theory,
explain how vertical integration between GM and Fisher alleviated this
4. Recently, franchisees have brought suit against franchisors, claiming
that contractual provisions which limit who they can purchase inputs from
are unfair trade practices. Provide an efficiency explanation for such
practices. Suppose Congress passes a law prohibiting such provisions in
all new franchisor/franchisee contracts. How would you expect contracts
between franchisors and franchisees to change as a result? That is, what
other contractual provisions would you expect to change?