Deck 15: Contracting,governance,and Organizational Form

Question 1

​Expectation damages:

A) ​leave the parties no worse off than was anticipated under the contract.
B) ​are designed to elicit efficient precaution and efficient reliance on promises.
C) ​are readily awarded by the courts
D) ​a through c
E) ​a and c only

Answer 1

D

Question 2

Reliant assets are always all of the following except:

A) durable
B) have substantially less value in second best use
C) dependent on unique complementary inputs
D) pivotal in designing strategy

Answer 2

C

Question 3

​Regarding the frustration of purpose doctrine,which of the following statements is true?

A) ​the purpose for which seller entered into the contract has become illegal
B) ​​the purpose for which buyer entered into the contract has become illegal
C) ​the purpose of the contract has become illegal
D) ​the contract no longer facilitates deferred exchange

Answer 3

C

Question 4

When borrowers who do not intend to repay are able to hide their bad credit histories,a lender's well-intentioned borrowers should

A) complain to regulatory authorities
B) withdraw their loan applications
C) offer more collateral in exchange for lower interest charges
D) divulge still more information on their loan applications
E) hope for a pooling equilibrium

Question 5

Non-redeployable durable assets that are dependent upon unique complementary and perfectly redeployable assets to achieve substantial value-added will typically be organized as

A) an export trading company
B) a spot market contract
C) a vertically integrated firm
D) an on-going relational contract
E) a joint stock company.

Question 6

Each of the following is an example of moral hazard in which people modify their behavior in an opportunistic way,often frustrating the intent of governmental or management policies.Which is NOT an example of moral hazard?

A) After a firm gets a loan from a bank to purchase inventory,the borrower instead decides to use it to invest in call options on stocks.
B) Based on motorcycle accident data,a state passes a law requiring motorcyclists to wear helmet,but then the motorcyclist wearing helmets start to drive faster and more recklessly.
C) Bank and nonbank mortgage lenders make money granting loans.But the Government through Freddie Mac and Fannie Mae decides to purchase these loans.The mortgage lenders find that they earn a fee for each mortgage that they grant and then sell to Freddie Mac or Fannie Mae.Since they never intended on holding on to the mortgage,the mortgage granters are not too particular on whether the customer can really pay it back.The lowest quality loans are sold to the Government.
D) A fellow buys a $1 million life insurance policy and then travels to Nepal to climb Mount Everest.
E) A student learns that if he or she reads the chapter and studies lecture notes,the student does better on the next test.

Question 7

When someone contracts to do a task but fails to put full effort into the performance of an agreement,yet the lack of effort is not independently verifiable,this lack of effort constitutes a

A) breach of contractual obligations
B) denial of good guarantee
C) loss of reputation
D) moral hazard

Question 8

Which of the following is not among the functions of contract?

A) to provide incentives for efficient reliance
B) to reduce transaction costs
C) to discourage the development of asymmetric information
D) to provide risk allocation mechanisms

Question 9

Buying electricity off the freewheeling grid at one quarter 'til the hour for delivery on the hour illustrates:

A) relational contracts with distributors
B) vertical requirements contracts
C) spot market transactions
D) variable price agreements

Question 10

When retail bicycle dealers advertise and perform warranty repairs but do not deliver the personal selling message that Schwinn has designed as part of the marketing plan but cannot observe at less than prohibitive cost,the manufacturer has encountered a problem of ____.

A) reliance relationships
B) uncertainty
C) moral hazard
D) creative ingenuity
E) insurance reliance

Question 11

Mac trucks and their dealers would likely have an organizational form of

A) fixed profit sharing franchise contracts
B) spot market recontracting
C) alliances
D) vertical integration

Question 12

Appendix: Common value auctions with open bidding necessarily entail

A) asymmetric information
B) ascending prices
C) more than two bidders
D) amendment of bids
E) sealed final offers.

Question 13

To accomplish its purpose a linear profit-sharing contract must

A) induce the employee to moonlight
B) communicate a code of conduct that will be monitored and enforced
C) meet either the participation or the incentive compatibility constraint
D) establish a separating equilibrium
E) not realign incentives

Question 14

Contracts are distinguished from tactical alliances by which of the following characteristics:

A) involve sequential responses
B) require third-party enforcement
C) raise shareholder value
D) elicit diminished reactions from competitors

Question 15

Which of the following are not approaches to resolving the principal-agent problem?

A) ex ante incentive alignment
B) deferred stock options
C) ex post governance mechanism
D) straight salary contracts
E) monitoring by independent outside directors

Question 16

When manufacturers and distributors establish credible commitments to one another,they often employ

A) vertical requirements contracts
B) third-party monitoring
C) credible threat mechanisms
D) non-price tactics

Question 17

Agency problems appear in many settings within a firm.All of the following are examples,except which is NOT a good example of this problem?

A) Diversified stockholders are more enthusiastic on accepting business risks than are firm managers.
B) Firm managers receive cash bonuses based on the performance of the firm.
C) Employees sometime take items from the store in which they work.
D) Lenders to firms want the managers to invest in safe projects to protect their collateral in the project but managers want to invest in projects that will make a name for them and warrant promotion.
E) Firm managers sometime want to relax on the job.

Question 18

Vertical integration may be motivated by all of the following except:

A) Upstream market power
B) Economies of ever wider spans of managerial control
C) Technological interdependencies
D) Reduced search and bargaining cost
E) The hold-up problem.

Question 19

Governance mechanisms are designed

A) to increase contracting costs
B) to resolve post-contractual opportunism
C) to enhance the flexibility of restrictive covenants
D) to replace insurance
E) none of the above

Question 20

Appendix: An incentive-compatible mechanism for revealing true willingness to pay in a private value auction is

A) impossible
B) a Dutch auction
C) a second-highest sealed bid auction
D) a sequential auction with open bidding
E) a discriminatory price all-or-nothing auction.

Question 21

Appendix: A Dutch auction implies all of the following except

A) more than one unit sale available
B) higher prices later in the auction
C) identical expected seller revenue for common value items
D) greater expected seller revenue in estate sales with risk-averse bidders

Question 22

In the following sequential marketing game,is a threat by the manufacturer (Man)not to advertise a newly updated product unless the retailer (RET)promotes it a credible threat?

Question 23

Refer to Exhibit 15A-1.
Part B: What are the expected net profits to each partner under the incentives contract?

Question 24

Appendix: In comparing rules for serving a queue,last-come first-served has all of the following effects except

A) reduces the waiting time
B) causes few customers to arrive and depart more than once
C) increases the side payments among those yet to be served
D) hastens the adoption of a lottery system for deciding who should get the tickets

Question 25

Appendix: Sealed bids can be used in multiple rounds.How is this done?

A) The winner of the first round automatically wins all future rounds.
B) The winner's price in the first round is the reservation price in the next round.If higher prices come in the next round,the highest price is the new reservation price for round three,and so forth.
C) The second best price in the first round is the winner.
D) Bidding continues in more and more rounds until someone yells "uncle."

Question 26

Appendix: An incentive-compatible revelation mechanism is

A) self-enforcing
B) always multi-period
C) too complicated to influence decisions
D) prevalent in vertically integrated businesses
E) not adopted by franchise businesses

Question 27

Appendix: Each partner in a simple profit-sharing contract that splits the independently verifiable sales revenue minus unobservable cost has an incentive

A) to reject an automatic renewal of the contract
B) to understate fixed cost
C) to overstate avoidable cost
D) to understate customer loyalty for repeat purchases
E) to renew the partnership contract

Question 28

Appendix: Revenue equivalence theorem refers to equal seller revenue in which of the following pairs:

A) sealed bid auctions and English auctions
B) second highest wins and pays auctions and Dutch auctions
C) English highest wins and pays auctions and sealed bid Dutch auctions
D) highest wins and pays auctions and second highest wins and pay auctions

Question 29

Cooperative agreements between manufacturers and retailers concerning retail promotion and manufacturer advertising are often the key to the success of new products.Analyze the following sequential product promotion game,and then predict 1)whether the product will be updated by the manufacturer (Man),2)whether the retail distributor (RET)will promote the product,and 3)whether the manufacturer will advertise the product.No explanation necessary.

Question 30

Appendix: Auctions are used in place of markets when the items traded are unique (e.g.,a Ming vase or a right to drill for oil).Which of the following examples are typically sold using Vickrey auction methods?

A) For-sale-by-owner houses
B) Household furnishings
C) Items sold in Filene's Basement,with the price discounted after a certain date
D) Vintage postage stamps

Question 31

Appendix:
Refer to Exhibit 15A-1.
​
Part C: What is the expected net profit under the simple profit sharing contract,and why would the partners adopt an incentive-compatible revelation mechanism (i.e.,an optimal incentives contract)?

Question 32

Appendix: Winning an auction can be exhilarating,but it can also lead to doubt as to whether you did the right thing or not.This is called:

A) The regret effect.
B) Moral hazard.
C) Second wind.
D) The winner's curse.

Question 33

Appendix: An optimal incentives contract can induce the revelation of true costs in a partnership by

A) imposing penalties when costs are overstated
B) offering bonus payments when costs are verified
C) renewing the reliance relationship
D) linking revealed cost to the partner's foregone expected profits
E) enlisting third-party enforcement

Question 34

What are the expected net profits to Johnson & Johnson in a pharmaceutical R&D joint venture with Amgen given the following joint profit payoffs.The joint profit payoffs are the difference between $180 and the sum of the cost realizations.Assume that the three columns are equally likely to occur,each row is equally likely to occur.Both Johnson and Johnson and Amgen can cancel the project and both will then earn $0 if the cost revelations give early warning of losses. The figures in parentheses represent costs associated with the Low,Moderate and High cost realizations,and all figures are in millions.

Question 35

Appendix: Incentive-compatible revelation mechanisms attempt to

A) induce an employee to reject the next best alternative employment opportunity
B) elicit privately-held information
C) secure enforcement primarily by third parties
D) reject voluntary contracting with third parties
E) impose similar risk premiums on all employees

Question 36

Appendix: In Dutch auctions,the bidding

A) starts low and rises until the highest bidder wins.
B) is done in secret "sealed bids" which are opened at a specified time.
C) begins with a very high price,and is reduced until the first person takes it.
D) is accomplished by giving the price of the second highest bid to the highest bidder.

Question 37

Appendix: The principal advantage of an open bidding system for allocating telecommunications spectrum licenses was

A) the pooling of asymmetric information by the bidders
B) the reconfiguring of cell phone license areas
C) the substitute value of adjacent service areas
D) reduced cost

Question 38

Appendix:
If two art dealers bidding for a Picasso receive the following forecast information about the chance of a forgery which with previously unknown Picasso paintings is present 8 times in 10 historically,what is the amount by which strategic underbidding could be reduced if ten bidders were attracted to the auction?
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Question 39

Appendix: Research suggests that an auction for a private value item will yield the HIGHEST payout if:

A) we use a Dutch auction
B) we use an English auction
C) we use only cash,and not allow credit cards
D) use a fixed price