Problem Set 4 -- Due Wednesday, December 4
1. For many firms, allowing employees aceess to the World Wide Web (WWW) and internet-based electronic mail is potentially useful. The WWW permits employees rapid access to data and information they previously had to ask corporate librarians to obtain. Email is a lower cost and less intrusive means of communication than telephone conversations or fax exchanges. Lower information or communication costs can permit firms to realize new efficiencies.
However, as the attached article describes, the new capabilities can be value-decreasing when employees use them toward increasing their utility in ways that are not value enhancing to the firm.
Why is the misuse of firms' information and communication systems a potentially more severe problem with respect to the WWW and Email than in systems which rely on corporate librarians, letters, and faxes?
How might existing (pre-Web and pre-Email) information and communication systems be complementary with firms' organizational features? Explain why the features you cite or complements, using the definition of complementarities.
Why might a firm not respond to decreases in the price of electronic commerce (e.g., email) by moving away from a phone and fax-based system to an email-based system?
What organizational changes might be complementary to allowing employees web access and internet email accounts? Which of these might you be able to embed in the software itself? Which of these would involve changes in the relationships among employees, or between your firm and other firms?
2. Trucking firms' profitability is higher when their trucks are used intensively and when they are driven so that their engines are not abused. Intensive use of capital in this case means that trucks are fully loaded and en route from a shipper to a receiver. Trucks are used less intensively when drivers take long breaks during or between hauls. Truck engines are abused with the driver accelerates too quickly, especially in severe conditions such as when making steep ascents.
Different trucking firms specialize in different hauls. Some specialize in short, repetitious hauls between the same two places. For example, this type of firm might haul fresh vegetables from farmers to a railroad; each truck might make five round trips per day. Others specialize in longer hauls which can take four to five days. For example, this type of firm might take canned fruit from firms in the central valley to distributors and supermarkets on the East Coast, then take manufactured goods from the East to Western distributors on their return trips.
Truck drivers' activities can be difficult to monitor. (One could do so by putting a supervisor in every truck, but this would be very costly and possibly ineffectual.) While one may obtain a signal of their effort (Did the trucker arrive late? Did the engine explode?), this is reflects both their effort and factors outside of their control (Was there traffic or road construction on the way? Did the truck's previous driver abuse the engine?).
Assume that truck drivers are risk averse, but that trucking firms are risk neutral. You are hired to serve as a consultant to the firm.
Truck drivers choose their effort in (at least) two dimensions according to the above account. What are they?
Is it desirable to provide incentives toward eliciting effort in each dimension? Why or why not?
Is it desirable simply to rent trucks to drivers and allow them to keep all the proceeds from any hauls they make?
A new invention enables trucking firms to directly monitor how the truck driver is operating the engine. This invention records engine speed, ground speed, sudden accelerations, sudden decelerations, etc., and transmits these variables back to the trucking firm's computer.
Would this change how you compensate drivers? If so, how? If not, why not?
3. Describe the organizational and production technology innovations that took place during the late 1800s. Why were they complementary?
4. According to Nelson and Winter, why would management be more difficult for firms in industries where there are intermittent, unanticipated breakthroughs in technological capabilities (for example, in biotechnology) than in those where technological capabilites remain relatively constant over long periods (for example, in sugar production)?