Econ Fass Midterm Ch.6

Front 1

Spot Exchange

Back 1

When the buyer and seller of an input meet,exchange, and then go their separate ways.

Front 2

Contracts

Back 2

A legal document that creates an extendedrelationship between a buyer and a seller. Tradeoffs

Front 3

Vertical Integration

Back 3

When a firm shuns other suppliers and chooses toproduce an input internally

Front 4

Transactioncosts

Back 4

costsassociated with acquiring an input that are in excess of the amount paid to theinput supplier

Front 5

Specializedinvestment

Back 5

anexpenditure that must be made to allow two parties to exchange but has littleto no value in any alternative use

Front 6

Relationship-specificexchange

Back 6

Atype of exchange that occurs when the parties to a transaction have madespecialized investments

Front 7

Profitsharing

Back 7

Mechanismused to enhance workers’ efforts that involves tying compensation to underlyingprofitability of the firm

Front 8

Revenuesharing

Back 8

Mechanismused to enhance workers’ efforts that involves linking compensation to theunderlying revenues of the firm

Front 9

Site specificity

Back 9

occurs when the buyer and the seller of an inputmust locate their plants close to each other to be able to engage in anexchange

Front 10

Physical-asset specificity

Back 10

refers to a situation where the capitalequipment needed to produce an input is designed to meet the needs of aparticular buyer and cannot be readily adapted to produce inputs needed byother buyers

Front 11

Dedicated assets

Back 11

are generalinvestments made by a firm that allow it to exchange with a particular buyer

Front 12

Human capital

Back 12

workers must learn specific skills to work for aparticular firm

Front 13

Underinvestment

Back 13

If the worker perceives that he will not work atthe firm very long then he will not invest heavily in learning the task as hewould otherwise

Front 14

Hold –up problem

Back 14

Once a firm makes a specialized investment theother party may attempt to rob if of its investment by taking advantage of theinvestments sunk nature

Front 15

Costly bargaining

Back 15

parties bargain with each other over a price atwhich the input will be bought and sold sunk

Front 16

Optimal Input Procurement

Back 16

1. Spot Exchange

2. Contract

3. Vertical Integration

Front 17

principal – agent problem

Back 17

Shareholders (principal) cannot observe theeffort of the manager (agent).

Front 18

1. Discuss three forces that owners canuse to discipline managers

Back 18

Internal incentives Incentive contracts - Stock options, year-end bonuses. External incentives Personal reputation – managers have increased job mobility when they can demonstrate to other firms that they have the managerial skills needed to maximize profits Potential for takeover – If a manager is not operating the firm in a profit –maximizing manner, investors will attempt to buy the firm and replace management with new managers who will

Front 19

1. Describe the principal-agent as it relatesto managers and workers

Back 19

Manager (principal) cannot observe the effort ofworkers (agents).

Front 20

1. Discuss four tools the manager can useto mitigate incentive problems in the work place.

Back 20

Profit sharing – tying compensationto the underlying profitability of the firm

Revenue sharing – linkingcompensation to the underlying revenues of the firm

Piece rates – pay workers based on apiece rate rather than a fixed income

Time clocks and spot checks – verify whenan employee arrives and departs from the job & the manager enters theworkplace from time to time to monitor workers