Exhibit 15A-1
Suppose GM and Nucor Steel seek to develop jointly a new sheet metal and auto body stamping machine,and each party knows the payoffs in the following table of equi-probable outcomes but cannot independently verify one another's costs.Both GM and Nucor can cancel the project and both will then earn $0 if the cost revelations give early warning of losses.

Note: The figures in parentheses represent costs associated with the Low and High cost realizations,and all figures are in millions.The joint profit payoffs are the difference between $180 and the sum of the cost realizations.
-Refer to Exhibit 15A-1.
$\textbf{ Part C: }$ 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

Exhibit 15A-1
Suppose GM and Nucor Steel seek to develop jointly a new sheet metal and auto body stamping machine,and each party knows the payoffs in the following table of equi-probable outcomes but cannot independently verify one another's costs.Both GM and Nucor can cancel the project and both will then earn $0 if the cost revelations give early warning of losses.
  
Note: The figures in parentheses represent costs associated with the Low and High cost realizations,and all figures are in millions.The joint profit payoffs are the difference between $180 and the sum of the cost realizations.
-Refer to Exhibit 15A-1.
$\textbf{      Part C:   }$  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)?

Quizplus · Accepted Answer

The Answer is Here,GM must assume that mixed cost projects will be cancelled,since Nucor Steel must be predicted to overstate its costs.This will result in a cancellation of all projects for which GM experiences high cost--i.e. ,those with mutually high cost and those with mixed cost.Therefore,from GM's point of view,only one-half of the probability space can result in non-cancelled projects.Similarly,anytime Nucor experiences high cost it will predict cancellation as well.Therefore,only 0.5

imes

0.5

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$40 = $10 payoffs will be realized from the simple profit-sharing contract,and this expected $10 million would then be split between the partners.

Compare $5 million to $17.5 million.The simple profit-sharing contract results in too many cancellations in the presence of asymmetric information.This is most easily seen by thinking about all the possible outcomes for many trials of a one-shot game.In contrast,in repeated plays of this partnership,the parties may develop other ways to circumvent the cost overstatement problem (including reputation effects,reciprocity in sequential play in other partnership efforts--tit for tat,etc. )

Exhibit 15A-1 Suppose GM and Nucor Steel Seek to Develop Part C: \textbf{ Part C: } Part C:

Exhibit 15A-1
Suppose GM and Nucor Steel Seek to Develop $\textbf{ Part C: }$