Problem Set 3 -- Due May 29, 1998
1. Define quasi-rent. Describe a situation
where quasi-rents are exist, but not appropriable. In such a situation,
does the existence of quasi-rents provide an motivation for vertical integration?
2. In class I briefly mentioned that Alchian
and Demsetz' analysis sheds some light on organizational issues faced by
What decision rights are commonly held by franchisors within franchising
Applying Alchian and Demsetz, why do franchisors hold these rights
rather than individual franchisees?
Who "monitors the monitor" within franchise chains?
3. 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.
Do franchising arrangements serve to eliminate all incentive conflicts?
Does efficiency wage theory provide a coherent explanation for why compensation
generally increases with age for salaried workers? Why or why not?
4. 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., hauls 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?