APPLIED ECONOMICS FOR MANAGERS SESSION 17 I REVIEW STRATEGIC ISSUES INSIDE THE FIRM A PRINCIPAL AGENT PROBLEMS 1 SUPPLIERS INPUTS HAVE PRIVATE INFORMATION a ADVERSE SELECTION CHIP SUPPLIERS b MORAL HAZARD LEGAL SERVICES 2 EXAMPLE TOTAL BENEFIT OF LEGAL SERVICES TB 600L L2 AVERAGE BENEFIT OF LEGAL SERVICES AB 600 L MARGINAL BENEFIT OF LEGAL SERVICES MB 600 2L LAW FIRM FEE OF 200 PER HOUR GOAL IS TO MAXIMIZE BILLABLE HOURS IF CHOICE OF QUANTITY OF LEGAL SERVICES IS LEFT TO LAW FIRM MAXIMIZE BILLABLE HOURS SUBJECT TO CONSTRAINT THAT TOTAL BENEFITS TOTAL COST 600L L2 200L 400 L FIRM MAXIMIZATION OF NET BENEFITS MB MC 200 600 2L 200 L 200 TB 200 TC 400 MLAW GROUP S EXPLOITATION OF ASYMMETRIC INFORMATION CAN HURT THE FIRM L B COORDINATION PROBLEMS 1 COMPLEMENTARY INPUTS OR TEAMS 2 MULTIPLE NASH EQUILIBRIA C TIME CONSISTENCY AND FIRM SPECIFIC INVESTMENTS D ALL OF THE ABOVE ARE ISSUES OF CONTRACT DESIGN CONTRACTS MUST SOLVE 1 INCENTIVE ISSUES 2 PARTICIPATION CONSTRAINT II WHO S IN CHARGE GROUP DECISION MAKING AND ECONOMIC OUTCOMES A FREER TRADE IN FREDONIA B INDIVIDUAL RATIONALITY VERSUS COLLECTIVE IRRATIONALITY C STRATEGIC VOTING AND VOTE TRADING
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