Excel Homework Due 12/6 at 11 PM

This is the last Excel Homework and it is on the Shapiro-Stiglitz model.

This homework is on extensions of the basic Shapiro and Stiglitz model, with a particular focus on making the monitoring intensity a choice variable.

You should watch the video presentation of the basic model first.   This is a full lecture on the math of the model.  It takes about a half hour.  (If you want the PowerPoint file, a link to it is in the description of the video.)

The actual Shapiro and Stiglitz paper. 
The video that derives the equations in the paper.

Excel Homework Due 11/29 at 11 PM

Please watch this video first.  It gives the algebra of the principal-agent model and will make you comfortable with the notation and the basic ideas.

Then do the Excel homework, which does the same analysis but this time with a graphical approach.

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This is the simplest possible model of the principal-agent, with low or high effort and low or high output.  I am going to describe possible extensions of the model for you to consider (and which we might discuss in class) but which we won't model.

The first is to make output a continuous variable.  This, it turns out isn't conceptually that much harder, as long as higher output makes it more likely that the agent chose high effort.  In that case, the reward scheme should also rise with output.  In many real world reward schemes, the scheme is linear.  For example, it entails a base pay and then some percentage share of the output.  A lot of sales people work under schemes of this sort.  Linearity is hard to explain from the model, but it is easy to understand in that it can be readily communicated.  More complex schemes would be harder to articulate and to understand.

The second is to make effort a continuous variable, with higher effort making higher output more likely.  This too is not that hard to conceptualize, but then you lose the notion of shirking in the model, unless you establish a cutoff effort level below which the agent is said to shirk.

Further extensions make both output and effort multi-dimensional.  This is definitely harder to consider theoretically, but it is far more realistic, especially for knowledge work.  As I have said in class before, professional knowledge workers typically don't shirk (play solitaire on their computers all day or do Facebook, though they might do it as a diversion from time to time to refresh themselves).  Such employees have a strong sense of autonomy.  The issue for the manager is to align what these workers are doing with organizational objectives.  Monitoring happens to achieve alignment, not to prevent shirking.

The last extension I will mention is considering what happens when output has a large random component to it so it is not a very informative signal.  A little bit of randomness doesn't change the story much.  A lot of randomness does.  (The agent is risk averse and if you make a risk averse individual absorb a lot of risk, you need to pay a substantial risk premium to compensate for that.)  So instead, one looks for other solutions and then not rely on rewards for high output.

The Excel Homework with the Appropriate Formulas but with the Answers Omitted.

I have now completed the stuff to serve as substitute for class on Tuesday 11/7.  We won't be having class then.  In the next post I will provide the information for that.  

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As promised, here is the Excel file with the formulas (most of which are in column A).  I would appreciate learning from any and all of you whether you try to produce such formulas yourself before answering the questions, or if you do that all in your head without writing any of it down.  If you care to respond to that, please do so by commenting on this post, or if you prefer your privacy you can do it by email.  

Excel Homework Due 11/8 at 11 PM

The homework is on bargaining. Note that M&R have a discussion of bargaining in Chapter 5. You should read that. The model they go through has both the buyer and seller having two types. In the Excel homework, the model has a continuum of types on each side of the bargain. In that sense it is harder but also more elegant. And, I believe, it should give you a better understanding about the relationship between the private information and the inefficiency created.

There is a fiction in the model that helps to understand what is going on. The fiction is that there is a third party - an arbitrator - who provides rules for how the bargaining will happen, when trade will occur, and at what price. The fiction is necessary because the model is static. Real world negotiations happen over time and to model that correctly one needs a dynamic model. There are such models, but they are well beyond the scope of our class. So we will keep the modeling relatively simple and wave our hands about what happens in real world bargaining.

 There is a rather extensive discussion in this homework before you log in. I encourage you to read that carefully and not gloss over it. It is about how to bargain well and what happens in real-world procurement, which entails a good deal of such bargaining. There are practical lessons here that you can carry over to your work life, even if you don't engage in procurement. .

Excel Homework Due 11/1 at 11 PM

This is the homework on insurance under asymmetric information.  Note that the economics here is harder (I tried to keep the math as simple as I could).  If you have questions on the mechanics for producing an answer in Excel, please post those as comments to this post.  If however, you have questions about the underlying economics, note that I plan to lecture on this in class the following day, to explain both the modeling and the consequences of the model. 

Please look at this before you start the next Excel homework, which is due 10/25 at 11 PM

Each of these should be reviewed before doing the next Excel homework, which assumes that such a review has been performed.  They should be familiar already, based on what you've been exposed to in Econ 202 and 203. There may be some new stuff on risk preference. I'd be curious to learn what is old hat and what is new for you. Note that there is a bit of overlap between each of these. Nonetheless, I strongly encourage you to review them all, so you have a firm understanding of the fundamentals. The second one emphasizes an algebraic approach. The third, a graphical approach. You should be familiar with both.

Notes on the Math and Philosophy of Probability  (This is a pdf file.)  There is a slight error in this - a line I attributed to Keynes actually comes from Mark Twain.  Otherwise, it is pretty basic stuff.

Increasing Risk and Risk Aversion (This is a video in YouTube.  You can find a link to the PowerPoint file on which it is based in the description of the video.)

Expected Utility and Jensen's Inequality (This a video in YouTube.  You can find a link to the PowerPoint file on which it is based in the description of the video.)

You should be able to get through all of this in under 45 minutes.  Of course, the less familiar it is to you, the longer it will take to get a good understanding.

The last bit on expected utility is based on the book by John von Neumann and Oskar Morgenstern called Theory of Games.   Maximizing expected utility is what economists think of when they refer to economic rationality.

Excel Homework On Coordination Failures and Coordination Mechanisms

Please post questions about the homework as comments on this post.

PLEASE DON'T TYPE IN DECIMALS.  USE CELL REFERENCES.  IT MAY SEEM A PAIN, BUT YOU'LL GET GOOD RESULTS THAT WAY.

Excel Homework on Strategic Look at the Efficiency Principle

The homework goes beyond the Milgrom and Roberts textbook because I think it is important to have a mature view of when to expect rational people to produce efficiency and when that won't happen.  Also note that efficiency here is contained to the parties of the bargain only.  If outsiders get screwed as a result, looking at that you might say the situation is not really efficient, but such an example doesn't count as a violation of M&R's principle.  If the parties in the bargain themselves can't reach an agreement, that would be an example that violated M&R's principle.

Also note that the homework only works through the case of two-player games.  It doesn't consider the multi-player case.  That is for simplicity in the modeling, not for realism.

As with all the Excel homework, if you have questions about this one, please write them as a comment to this post.

Some Work History Relevant for Our Class/About The Excel Homework

SCALE.....Mallard......Before Mallard there was Plato.

CET..... Me as Director of CET.....  Story about Leslie as office manager then Assistant Director

Later merged with CCSO to become CITES.

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Excelets Page

profarvan channel at YouTube

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Further thoughts on Excel homework
1.  Dialogic - presentation and assessment are mixed together.
2.  Somewhat limited - you need more practice than I can give you.
3.  Students sometimes rush through these to get them done.  They can be redone for practice by choosing a different alias.

Excel Homework Due 9/20 at 11 PM

If you have questions or comments about the Excel Homework on Efficiency Concepts, please post them as comments to this post.  Do not email me with those.   Only email me about the homework if you are having some technical issue that prevents you from completing it.

Excel Homework Due 9/13 at 11 PM

This homework should be straightforward.  However, if you have some difficulty please post a question as a comment to this post.  You can also try to catch me after class or set up a meeting with me at some other time.  In either case, you should have your laptop with you then so we can see what the issue is in your own computing environment.