PowerPoint Slides © Michael R. Ward, UTA 2014

Today• Syllabus• What the Course is About

• What this Book is About• The One Lesson of Business

Econ 5313

Oil Lease Bidding• A young geologist was preparing a bid recommendation for an oil

tract in the Gulf of Mexico. His expertise and the information at hand led him to recommend a bid of $5 million. Instead, a senior manager bid $20 million - far over the next highest-bid of $750,000. What, if anything, is wrong?

• After winning the bid, the geologist increased the estimated reserves of the company. But, after a dry well was drilled, the reserve estimates were decreased. Would this have been inappropriate?

• Then the senior manager stepped in and ordered an increase in the reserve estimate. Why?

• The senior manager collected a bonus based on increased value of assets and resigned several months later. How does this help to understand the situation?

• How would you fix the problem?

Econ 5313

Insurance• Two similar surgeries are breast reconstruction and

breast augmentation. Breast augmentation is cosmetic surgery not covered by health insurance. Patients who want the surgery must pay for it themselves. Breast reconstruction following breast removal due to cancer is covered by insurance. What would you infer about the prices of each? Why?

• The price for the first has increased by about 10% each year since 1995 while the other has increased by only 2% per year. Why?

• Because it is easier to spend other people’s money.

Econ 5313

Daycare PickupA manger of a daycare center in Haifa, Israel has a clearly stated policy that parents are supposed to pick up their children by 4pm (16:00). But often parents are late. Each week, there is an average of eight late pickups. To combat tardiness, the manager of the center instituted a fine of $3 per child per incident. Surprisingly, the number of late pickups more than doubled, to twenty per week. Why?

Econ 5313

Catching Shoplifters• An employee of Whole Foods in Ann Arbor, Michigan, was

fired in 2007 for apprehending a shoplifter. • More specifically, he was fired for touching a customer; even

though that customer had a backpack filled with stolen groceries and was running away with them.

• What incentives does this imply for would-be shoplifters? • Under what circumstances might this decision be efficient for

Whole Foods?• Under what circumstances might this decision be best for the

citizens of Ann Arbor?• Does Whole Foods have a social responsibility to stop

shoplifters?

Econ 5313

Going Green• In 2008, Exxon-Mobil shareholders fought off a

number of resolutions that appear to have originated with the Rockefeller descendants. One was a green resolution to "invest more profits in alternative sources of energy."

• What would be the likely effect of such an amendment on shareholder wealth?

• Suppose the CEO’s ex-felon brother-in-law were to set up an alternative energy exploration firm. Should the CEO direct investments there?

Econ 5313

Corporate Social Responsibility• “There is one and only one social responsibility of

business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

• Problems?• From Capitalism and Freedom, Milton Friedman

Econ 5313

From the Blog• Chapter 1• Market for Corporate Control• Being a Good Samartian

Econ 5313

Main Points• Using the rational-actor paradigm helps to understand behaviors.• Try to picture the incentives of all actors involved in a decision.• Good incentives are created by rewarding good performance.• Design organizational structures so that employees have enough

information to make good decisions, and the incentive to do so.• You can analyze any problem by asking three questions: (1) Who?;

(2) Enough information?; and (3) Good incentives? • Solutions are centered on changing : (1) decision rights; (2)

information flow; or (3) incentives.

Econ 5313