Question 1

Explain tournament theory and include an example of the theory in practice.

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Question 2

If your economics professor grades on a curve and all students agree to get together (i.e., collude) and not study, overall effort is reduced and the grade distribution remains relatively unchanged. Explain whether this is a realistic outcome. Does your answer differ depending on whether the class is large or small? Relate your answer to the problems of collusion in cartels discussed in the chapter on oligopolies.

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Question 3

The CEO of a pharmaceutical sales company wants to find a way to increase both the sales figures as well as the effort level of the company's employees. A lower-level manager suggests that a tournament system that rewards the salesperson with the highest level of sales with a one-time $50,000 bonus would certainly increase both sales and effort across the company. What are the pros and cons of implementing such a program? Should the CEO adopt a program such as this? If so why? If not, why not?

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Question 4

What is the difference between intrinsic and extrinsic motivation?

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Question 5

An advertising company designs a bonus system for its managers such that the faster they spread their advertisements around the world, the greater the bonuses they get. What are some of the pitfalls of such an incentive scheme?

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Question 6

Suppose college administrators make it a top priority of the institution to increase the quality of their professors' teaching. They also believe in the power of incentives, and institute a system where teachers receive bonuses for high teaching evaluations. Explain whether this incentive scheme will help to increase the quality of teaching at the institution.

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Question 7

In Bangladesh, Professor Mohamed Yunus started the Grameen Bank from which poor borrowers (mostly women) who do not have collateral are given small loans as seed money for businesses or other projects. Loans are provided to groups of five women, who receive the loans sequentially. Once the first borrower has established a repayment schedule, the second borrower receives her money, and so on. How do you think an organization such as the Grameen Bank might ensure that the borrowers are indeed creditworthy? Remember that the bank does not have any information about the borrowers' creditworthiness and it is in the group's best interest to maintain a good loan repayment schedule so that they are eligible for bigger loans as time progresses.

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Question 8

Economists think that what matters for choices are not prices and incomes.

Accepted Answer

Economists believe that prices and incomes are important factors in shaping individuals' choices, as they determine the costs and benefits of different options.

Question 9

"You get what you pay for, but what you pay for is not always what you get." What does this mean in terms of an incentive scheme?

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Question 10

Planning where, when, and how choices are made is sometimes called "choice architecture." Give an example of this.

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Question 11

What compensation scheme might improve the performance of the highly paid CEOs affected by external market forces?

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Question 12

Explain how piece rate and hourly wage attracts different types of workers. Explain how the two methods may affect earnings inequality.

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Question 13

What are the benefits and problems of piece rate systems?

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Question 14

Hart, Shleifer, and Vishny (HSV) argue that private prisons have strong incentives to cut costs at the expense of quality, therefore public prisons are better than private prisons. Is there a problem with HSV's argument? If so, explain.

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Question 15

Inspired by Sunstein and Thaler, the British government has created a Behavioral Insights Team, popularly called the "nudge unit," for what reasons?

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Question 16

What is meant by the term corporate culture?

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Question 17

Use an example to describe how strong incentive schemes may lead to undesirable outcomes when the gap between "what you pay for" and "what you want" is significant.

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Question 18

Explain what is meant by the term incentives, and why it is important to get incentives right.

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Question 19

Companies sometimes doctor their earnings statements to appear more profitable than they are. What incentive might a CEO who engineers this be responding to?

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Question 20

When designing an incentive scheme for workers, how can management insure that the incentive scheme actually results in workers working harder?

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Quiz 22: Managing Incentives