Tài liệu Microeconomics for MBAs 10 docx

The basic problem is that the practice of scaling down welfare benefits as earned income rises creates an implicit marginal tax on additional earned income that discourages the poor from

proverbial one basket by initiating several new ventures, thereby spreading the risk of

doing business In the same way, investors spread their risk by investing in a wide

variety of companies, and firms spread their risk by producing a number of products

To give another example, criminal behavior may appear irrational if only the raw

costs and benefits are considered A burglar who nets $1,500 from the sale of stolen

property may have to spend a year in jail if caught, prosecuted, and convicted He could lose the annual income from his legitimate job, perhaps $10,000 That is a high cost to

pay for a $1,500 profit on stolen property, but he pays that cost only if he is caught,

prosecuted, convicted, and sentenced The police cannot be everywhere at all times;

prosecutors may be reluctant to prosecute; and suspended sentences are commonplace All in all, even an inept burglar may have no more than a 10 percent chance of spending a year in jail.4

To estimate the actual cost faced by the burglar who is caught, sentenced, and sent

to jail for a year, we might multiply the cost if caught, $10,000, by 0.10 That calculation indicates that to a burglar who is sent to jail for an average of one out of ten burglaries,

the cost of any one burglary is only $1,000 ($10,000 x 0.10) Thus the actual cost of the burglary is less than the benefits received, $1,500 Although it may be morally

reprehensible, the criminal act can conceivably be a rational one

Surveys of criminal activities and their rewards tend to support such a conclusion

A study of burglary and grand larceny cases in Norfolk, Virginia, showed that for the

unusual criminal who committed just one crime and was caught in the act, crime did not

pay The typical criminal, however, convicted the average number of times and

sentenced to the average number of years in prison, more than tripled the lifetime income

he could have earned from a regular salaried job—even allowing for one or more years of unsalaried incarceration.5 When this study was replicated in Minnesota, the results were

not quite as dramatic, but the criminal’s lifetime income still doubled.6 For criminals who

are never caught, crime pays even more handsomely

The same logical process of discounting can be applied to your life as a student

When you signed up for your MBA program, you actually had limited information on

how it would work out for you (Admit it, it was a gamble!) Similarly, when you sign up for courses, you usually have only a very rough idea of how difficult and time

4

This is not an unreasonably low figure Gregory Krohm “concluded that the chance of an ‘adult’

(seventeen or older) burglar being sent to prison for any single offense is 0024 For juveniles the risk

was much lower, 0015.” “The Pecuniary Incentives of Property Crime,” in The Economics of Crime and

Punishment, ed Simon Rottenberg (Washington, D.C.: American Enterprise Institute for Public Research,

1973), p 33

5

William E Cobb, “Theft and the Two Hypotheses,” in The Economics of Crime and Punishment, ed Simon Rottenberg (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1973), pp

19 30

6

David L Johnson, “An Analysis of the Costs and Benefits for Criminals in Theft” (Economics

Department, St Cloud State College, St Cloud, Minn., May 1974), mimeographed

consuming they will be, and what benefits you will receive from them In other words,

you are rarely certain of their costs and benefits To make your decision, you will have to discount the raw costs and benefits by the probability of their being realized Risks are

pervasive in human experience, and rational behavior takes those risks into account

What Rational Behavior Does Not Mean

The concept of rational behavior often proves bothersome to the noneconomist Most of the difficulties surrounding this concept arise from a misunderstanding of what rationality

means Common objections include the following:

1 People do many things that do not work out to their benefit A driver speeds and ends up in the hospital A student cheats, gets caught, and is expelled

from school Many other examples can be cited To say that people behave rationally does not mean that they never make mistakes We can calculate our options with some probability, but we do not have perfect knowledge, nor can

we fully control the future Chances are that we will make a mistake at some point, but as individuals, we base our choices on what we expect to happen,

not on what does happen We speed because we expect not to crash, and we cheat because we expect not to be caught Both can be rational behaviors

2 Rational behavior implies that a person is totally self centered, doing only

things that are of direct personal benefit Rational behavior need not be

selfish Altruism can be rational; a person can want to be of service to others, just as he can want to own a new car Most of us get pleasure from seeing

others happy—and particularly when their happiness is the result of our

actions Altruism may not always spring from rational cost-benefit

calculations; however, it is not always inconsistent with economic rationality Self interest, moreover, does not necessarily stop at the individual For

many actions, “self” includes members of one’s family or friends When a

father spends a weekend building a tree house for his children, economists say that he has been engaged in self interested behavior

3 People’s behavior is subject to psychological quirks, hang ups, habits and

impulses Surely such behavior cannot be considered rational Human

actions are governed by the constraints of our physical and mental makeup

Like our intelligence, our inclination toward aberrant or impulsive behavior is

one of those constraints It makes our decision-making less precise and

contributes to our mistakes, but it does not prevent our acting rationally

Moreover, what looks like impulsive or habitual behavior may actually be the product of some prior rational choice The human mind can handle only so

much information and make only so many decisions in one day

Consequently, we may attempt to economize on decision making by reducing some behaviors to habit Smoking may appear to be totally impulsive, and the physical addition that accompanies it may indeed restrict the smoker’s range

of choices Why might a person pull a cigarette from the pack “without

thinking”? Perhaps because she has reasoned earlier that contemplating the

pros and cons of smoking each and every time she things of cigarettes is too

costly By allowing smoking to become more or less automatic, the smoker

probably increases the number of cigarettes she smokes daily, but she sees the tedium of having to make the decision each and every time she smokes

4 Rational behavior implies that people know what they want, that they know

which alternatives are available, and that they know how to act on that

information People cannot assimilate all the information they need to make

rational choices, however People do lack information, and they could make

better choices if information were easier to obtain However, rational

behavior does not require perfect information People will make choices on

the basis of the information they have or can rationally acquire If they have

less than perfect information, they may make mistakes in their choices The

success or failure of their choices must be judged within those constraints

5 People do not necessarily maximize their satisfaction For instance, many

people do not perform to the limit of their abilities Satisfaction is a question

of personal taste To some individuals, lounging around is an economic good;

by consuming it, they increase their welfare Criticism of such is tinged with

normative value judgments An observer who equates rational behavior with

what he or she considers good will have no trouble demonstrating that such

behavior is irrational Irrational behavior is behavior that is inconsistent or

clearly not in the individual’s best interests and that the individual recognizes

as such at the time of the behavior

6 But to the economist, the values of the actor, not the observer or the social

critic, determine the rationality of an act Harold, not Jennifer or Max,

determines the rationality of Harold’s behavior

Disincentives in Poverty Relief

Our discussion of rational behavior can be used to understand one of the biggest policy

issues of our time, welfare reform We can do this by assuming that welfare recipients

are tolerably rational

So much of the public discussions about welfare programs, especially cuts in

them, assumes that since Congress has the authority to change the programs, it can alter

the programs any way it wishes without creating problems However, as we can easily

see, Congress is in something of an economic, if not political, bind on welfare relief,

given how incentives change when the program is adjusted The basic problem is that the

practice of scaling down welfare benefits as earned income rises creates an implicit

marginal tax on additional earned income that discourages the poor from working Why

not lower the implicit marginal tax rate?

Figure 3.3 gives the answer The 45 degree line that extends out from the origin

indicates points of equal distance from each axis—that is, points at which spendable

income equals earned income At point y, for example, a poor person earns and can

spend $5,000 annually At points above the line, spendable income exceeds earned

income For instance, at point x, a poor person earns $5,000 annually and can spend

$7,500 He receives a subsidy equal to y – x, or $2,500

FIGURE 3.3 Policy Tradeoffs of a Negative

Income Tax

With a guaranteed income of SI1 ($5,000) and a

break even earned income level of EI1 ($10,000),

the implicit marginal tax rate on the poor is 50

percent If policymakers attempt to reduce the

implicit tax rate by raising the break even income

level, however, the government’s poverty relief

budget will rise by the shaded area SI1 ab A higher

explicit tax burden will fall on a smaller group of

taxpaying workers

Suppose the government establishes a negative income tax with a guaranteed annual

income level of $5,000, or SI1 The break even earned income level is $10,000, or EI1

A person who earns nothing will receive a subsidy of $5,000 a year As his earned

income rises the subsidy will decline, until it reaches zero at $10,000 Curve SI1 shows

the spendable income of people in this program at various earned income levels They

lose $500 in subsidies for every $1,000 of additional earned income That is, they face an implicit marginal tax rate of 50 percent

If policy markers want to reduce the implicit marginal tax rate on an earned income of

$10,000 to less than 50 percent, they must either reduce the guaranteed spendable income level or raise the break even earned income level If they raise the break even earned

income level—to $15,000, or EI2, for example—curve SI1a will shift to SI1b But then

more people—all those with earned incomes up to EI2—will receive benefits Moreover, all the people covered originally will receive larger subsidies A person with an income

of $5,000 would receive $8,000 instead of $7,000 in spendable income (point z instead of point x), for example The total increase in the government’s poverty relief expenditures

would equal the shaded area in the figure bounded by SI1ab

The increase in expenditures would place a greater tax burden on taxpaying workers

Yet because more workers would be covered by the negative income tax, fewer people

would share the increased tax burden Thus the explicit marginal tax rate on high

income workers rises—lowering their incentive to work and earn additional income

If the government reduces the guaranteed income level, say from SI1 to SI0, a different

problem will result On the new curve SI0 a, the poor will receive less government aid at

each earned income level They may have more incentive to work under such an

arrangement, but will they have enough to live on?

Policymakers, then, face difficult tradeoffs between the goal of helping the poor and

the goal of minimizing the disincentive to work To provide adequate aid, they may have

to raise the breakeven income level high enough that people who are not strictly poor

benefit Yet to reduce aid to people who are not truly poor, they would have to lower the break even income level—thus increasing the implicit tax rate on the poor To keep

the implicit marginal tax rate down, they could lower the guaranteed income level—

decreasing the benefits that go to the truly poor

Our graphic analysis suggests that there may be economic as well as altruistic

limits to the government’s ability to transfer income from the rich to the poor As more

and more income is allocated to the poor, either the guaranteed income or break even

income level must go up If only the guaranteed income level is raised, the implicit

marginal tax rate facing the poor increases If that problem is avoided by raising the

break even income level, poverty relief will cover more people, and the taxes paid by

the remaining workers will go up Increased aid to the poor thus should have three

consequences A higher explicit tax burden will fall on fewer taxpayers Because of this

burden, higher income groups will have less incentive to work, and lower income

groups, because of the higher implicit tax rate, will also be less inclined to work

MANAGER’S CORNER: The Last-Period Problem

Much of this chapter has been concerned with how people behave rationally Here, we

introduce “opportunistic behavior” as a form of rational behavior that people in business

will want to protect themselves from We suggest ways different parties to business deals

can take advantage of other parties and how managers can structure their organizational

and pay policies to minimize what we call “opportunistic behavior.” More specifically,

this section is concerned with how an announced end to a business relationship can

inspire opportunistic behavior Its goal is, however, constructive, structuring business

deals – and the embedded incentives in order to maximize the durability and

profitability of the deals To do that, business relationships must be ongoing, or have no

fixed end, to the extent possible Having a fixed termination date can encourage

opportunistic behavior, which can reduce firm revenues and profits That is to say, a

reputation for continuing in business has economic value, which explains why managers

work hard to create such a reputation

Problems with the End of Contracts

A terrific advantage of dealing with outside suppliers is that the relationship is constantly

up for renewal and can easily be terminated if it is not satisfactory to both parties But

therein lies an important disadvantage of dealing with outside suppliers: the relationship

lacks permanence or confidence that any given buyer/supplier relationship will be

renewed The supplier must attribute some probability that the end of the contract will be

the end of the relationship, given that he or she might not be the next low bidder, a

deduction that can have profound effects on the relationship that the astute manager must

recognize Without much question, firms have begun to develop relationships with

suppliers that approximate partnerships because of the “last-period” problems inherent in

relationships that are totally grounded in the low bidder status of the suppliers

The basic problem is that during the last period of any business relationship, there

is no penalty for cheating, which implies maximum incentive to cheat As a

consequence, cheating on deals in the last period is more likely than at any other time in

the relationship

Consider a simple business deal Suppose that you want a thousand widgets of a

given quality delivered every month, starting with January and continuing through

December, and that you have agreed to make a fixed payment to the supplier when the

delivery is made If you discover after you have made payment that your supplier sent

fewer than a thousand units or sent the requisite thousand units but of inferior quality,

you can simply withhold future checks until the supplier makes good on his or her end of

the bargain Indeed, you can terminate the yearlong contract, which can impose a

substantial penalty for any cheating early in the contract Knowing that, the supplier will

tend to have a strong incentive early on in the contract period to do what he or she has

agreed to do

However, the supplier’s incentive to uphold his or her end of the bargain begins to fade as the year unfolds, for the simple reason that there is less of a penalty in terms of

what is lost from your ending the working relationship that you can impose The

supplier might go so far as to reason that during the last period (December), the penalty is

very low, if not zero The supplier can cut the quantity or quality of the widgets

delivered during December and then can take the check before you know what has been

done The biggest fear the supplier has is that you might inspect the shipment before

handing over the final check You may be able to get the supplier to increase the quantity

or quality somewhat with inspection, but you should expect him or her to be somewhat

more difficult to deal with And you should not expect the same level of performance or

quality

The problem is that you have lost a great deal of your bargaining power during

that last month, and that is the source of what we call and mean by the last-period (or

end period) problem, meaning the costs that can be expected to be incurred from

opportunistic behavior when the end of a working relationship approaches It is a

problem, however, that can be mitigated in several ways The simplest and perhaps most

common way is by maintaining continuing relationships If you constantly jump from

one supplier to another, you might save a few bucks in terms of the quoted prices, but

you might also raise your costs in terms of unfulfilled promises by suppliers during the

last period of their association with you “Working relationships,” in other words, have

an economic value apart from what the relationship actually involves, for example, the

delivery of so many widgets This is one important reason businesses spend so much

time cultivating and maintaining their relationships and why they may stick with

suppliers and customers through temporary difficulties

Solutions to the Last-Period Problem

Nothing works to solve the last-period problem, however, like success The more

successful a firm is the greater the rate of growth for the firm and its industry the

more likely others will recognize that the firm will continue in business for sometime into

the future The opposite is also true failure can feed on itself as suppliers, buyers, and

workers begin to think that the last period is near Firms understand these facts of

business life As a consequence, executives tend to stress their successes and downplay

their failures Their intent may not be totally unethical, given how bad business news can

cause the news to get worse Outsiders understand these tendencies As a consequence, many investors pay special attention to whether executives are buying or selling their

stock in their companies The executives may have access to (accurate) insider

information that is not being distributed to the public

Another simple way of dealing with the last-period problem in new relationships

is to leave open the prospect of future business, in which case the potential penalty is

elevated (in a probabilistic sense) in the mind of the supplier When there is no prospect

of future business, the expected cost from cheating is what can be lost during the last

period When there is some prospect of future business, the cost is greater, equal to the

cost that can be imposed during the last period plus the cost (discounted by the

probability that it will be incurred) incorporated in the loss of future business

When dealing with remodeling or advertising firms, for instance, you can devise a

contract for a specified period, but you can suggest, or intimate, in a variety of creative

ways, that if the work is done as promised and there are no problems, you might extend

the contract or expand the scope of the relationship In the case of the remodeling firm,

you might point out other repairs in the office that you are thinking of having done In

the case of the advertising firm, you might suggest that there are other ad campaigns for

other products and services that you are considering

You should, therefore, be able to secure somewhat better compliance with your

supplier during the last period of the contract, and how much the compliance is improved

can be related to just how well you can convince your supplier that you mean business

(and a lot of it) for some time into the future However, we are not suggesting that you

should outright lie about uncertain future business The problem with lying is that it can,

when discovered, undercut the value of your suggestions of further business and bring

back to life the last-period problem You need, in other words, to be prepared to extend, from time to time (if not always), working relationships when in fact they work the way

you want them to work

However, if you are not able to develop that impression, the last period can come sooner than you might think (or sooner than December in our earlier example) That is,

the contractual relationship can unravel because of the way you and the supplier begin to

think about what the other is thinking and how the other might act as a consequence

If both you and your supplier are inclined to cheat on the contract, and you have

already figured that your supplier will cheat to the maximum (send nothing) during the

last period, then December becomes irrelevant and November becomes the last period

Your incentive then is to cheat on the supplier in November Well, with November now

the last period, you can imagine what your supplier is thinking He is contemplating

cheating in November before you get a chance to cheat Ah, but you can bet the supplier

by cheating in October That thought suggests that when contemplating the contract

before it is signed and sealed, you and the supplier can reach the conclusion that January

is the (relevant) last period which means that the deal will never be consummated In

this way, the last-period problem becomes a first period problem, actually one of

setting the terms of the contract This way of thinking about it can make the signing

problematic, and more costly than it need be, assuming there are ways around the

problem

This line of argument reminds us of an old joke about a prisoner condemned to

death As it happened, the prisoner was told on Sunday that he would be hung between

Monday and Saturday, but the day of his hanging would be a total surprise He reasoned,

“They can’t hang me on Saturday because it wouldn’t be a surprise So, Friday is the last day of the relevant period.” Therefore, he reasoned, “They can’t hang me on Friday

because if they wait until then, it won’t be a surprise.” Continuing this line of reasoning,

Friday gave way to Thursday being the last day, and so forth He eventually concluded

that they couldn’t hang him Of course, when they hung him on Wednesday, he was

really surprised!

This joke suggests that the last period problem doesn’t always lead to an

unraveling in which the last period becomes the first But the last period problem is

potentially serious and is one reason that firms exist: firms are collections of departments

(and people) who have continuing relationships that are not always up for re bidding,

which means that the parties can figure that they will be continued, with there being no

clear last period The last-period problem is also a significant reason why the

corporation is such an important form of doing business The corporation is a legal

entity whose existence is independent of the life of the owner or owners; the corporation

typically lives on beyond the death of the owners Given that ownership is in shares, the

corporation makes for relatively easy and seamless transfer of ownership, which means

the life of the company is, in an expectational sense, longer as a corporation than as a

partnership or proprietorship, two organizational forms that die with the owners This

means that the corporate charter should be prized simply because it adds value to the

company by muting (though not always eliminating) the last-period problem

The last-period problem extends beyond buyer supplier relationships of the sort

we described above involving the purchase of widgets There is clearly a last-period

problem for military personnel When officers or enlisted men and women are given

their transfer orders, they can sit back and relax, given that the penalties that can then be

imposed on them have been severely limited by the orders to move on The problem

becomes especially severe when personnel are about to leave the military altogether

Military people have a favorite expression for what we call shirking during the last

period They call it “FIGMO”: “F k you, I’ve got my orders.” We are sure that the military has devised a variety of ways to mute the impact of FIGMO, but it is equally

clear that the problem of shirking as military men and women approach the ends of their

assignments remains a pressing one Sometimes you just have to accept some costs of

shirking (otherwise you might end up concluding that people should be fired the moment

they enlist, which can be more costly than the shirking)

The last-period problem can surface with a vengeance when an employee who has access to easily destroyed records and equipment is fired The firm doing the firing must

worry that the employee will use his or her remaining time in the plant or office to

impose costs on the firm, to “get back” at the firm As a consequence, firings are often a

surprise, done quickly, with the employee given little more time than to collect his or her

personal things in the office – all to minimize damage The firm may even hand the

employee a paycheck for hours of work not done, simply to make the break as quickly as possible and discourage fired workers from imposing even greater costs through damage

to records and equipment Indeed, when the potential for serious damage is present and

likely, firms may hire a security guard to be with the fired employee until he or she is

escorted to the door for the last time

The last-period problem can also show up in the greater incentives people have to shirk as they approach retirement To prevent workers from shirking, deferred

compensation can be used with some of the compensation withdrawn if shirking ever

does occur A variation of this type of solution for executives is to tie their compensation

to stock If executives shirk toward the ends of their careers, causing their companies to

do poorly, then the executives lose more than any remaining salary they are due for the

duration of their tenure; they lose the value of the stock, which approximated the

discounted value of the company’s lost earnings attributable to the executives’ shirking

while still on the job

Apparently, corporations’ executive compensation committees are aware of the

last-period problem Economists Robert Gibbons and Kevin Murphy have found from

their econometric studies that as CEOs get closer to retirement age, their compensation

tends to become more closely tied to their firm’s stock market performance.7

Another way of solving the last-period problem is through performance payments, which means that payments are made as a project is completed For example, separate

payments can be made for constructing a house when the house is framed, when it is

under roof, and when wiring is in and the interior walls have been finished However, a

significant portion of the total amount due is withheld until after the entire project is

7

Robert Gibbons and Kevin J Murphy, “Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence,” Journal of Political Economy , vol 100, n3 (June 1992), pp 468 506

completed and the results approved For example, 20 percent of the entire construction

cost is not paid until after the final inspection

Business critics often decry the extent to which many pension plans are not fully

“funded” that is, not enough has been set aside by the firm in investment accounts to

meet the retirees’ scheduled benefits The under funded pension plans can be a way by which firms seek to solve a form of the last-period problem of retired workers, especially

unionized workers, whose concern for the financial stability of the firm may stop when

they get their gold watch Unions often negotiate the retirement payments and fringe

benefits for unionized retirees at the same time they negotiate the pay packages for the

current workers Even when retirement benefits are fixed for retirees’ lives, the retirees

have an interest in the continuation of the firm, but only when the pension plans are not

fully funded When they are fully funded the retirees don’t have as much of a stake in the

continuation of the firms They can reason, “Who cares what the workers get paid, we’ve got ours!” When the retirement plans are not fully funded, the retirees must worry that

excessive wage demands by current workers can decrease the ability of the firm to fund

the retirement benefits in the future and thereby meet the scheduled benefit payments

Hence, under funded pension plans can be a way of tempering union wage demands by giving retirees a stake in wage rates than are lower than otherwise

The very fact that an “old” owner of a business can sell to a “young” owner also

enhances the incentive of the old owner to maintain the reputation of the firm However,

once the firm is sold, there is an incentive for the old owner to allow the firm’s reputation

to decline, a prospect that encourages a speedy transfer of a business when the deal is

closed If the new owner can’t take over the business in a timely fashion, then he or she

might overcome the last-period problem simply by insuring that the old owner retains

stock in the business

Of course, the new owner might prefer to have complete control of the business

once it is acquired However, the value of the share he or she controls might be greater if

the old owner retains some incentive to keep the reputation and material and human

resources of the business intact between the time the sale is completed and the transfer of

ownership is finalized Otherwise, the old owner may have an incentive not only to relax

on the job, but also to set up a totally new business and then raid the old company of its

key employees and customers

If the old owner retains some interest in the firm, then he or she also has an

incentive to work with the new owners, giving them time to develop the required

reputation for honest dealing with employees and customers and to take control of one of

the more elusive business assets the network of contacts The practice of keeping the

old owner on after the sale of the business is common among businesses such as medical

offices Doctors first form a firm that looks and operates like a partnership, after which

they finalize the sale In all of these cases, the old owners will want to work with the new

owners to make the transfer as “seamless” as possible, simply because the sale price will

be higher, and the greater the chance the new owner has to establish a reputation for

honest dealing and to take charge of the contacts