Deck 15: Contracting,governance,and Organizational Form

Question 1

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

Answer 1

A

Question 2

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

Answer 2

A

Question 3

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.

Answer 3

The manufacturer (Man)controls the endgame and the initial decision,but to analyze the optimal product update decision the manufacturer must predict the retailer's (RET)best reply promotion decision.And to select the optimal promotion decision,the retailer will look ahead and perform endgame analysis of the manufacturer's advertising decision.In the subgame where the manufacturer has updated and the retailer promoted .

Knowing that updating the product will result in a best reply retailer response of "not promote" and a payoff to the manufacturer of $280,the manufacturer then decides whether he would wish to not even update the product.Again,best reply responses by the retailer must be assumed.Looking ahead to the endgame,the retailer is again better off not promoting a product that hasn't been updated (i.e. ,$130 preferred to $60 in the bottom of the game tree).As a result,the manufacturer can realize only $150 from a decision not to update the product,and therefore prefers the $280 payoff from updating and advertising.

The subgame perfect equilibrium strategies are then (Update,Not Promote,Advertise)for a ($120,$280)payoff to (RET,Man).

Question 4

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 5

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 6

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 7

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 8

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 9

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 10

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 11

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 12

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

Question 13

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 14

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 15

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 16

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 17

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 18

Agency problems appear in many settings within a firm.All of the following are examples,except which is $\underline{\text{ NOT }}$ 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.