Spence, A. M. Market Signaling,Cambridge, MA: Harvard University Press, 1974.
The following works discuss the problem of incentives in contracting, medicine and finance, respectively.
Gawande, A. “The Cost Conundrum.” The New Yorker, June 1, 2009, pp. 36–44.
LePatner, B. B. Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Indus-
try. Chicago: University of Chicago Press, 2007.
Shiller, R.The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about
It. Princeton, NJ: Princeton University Press, 2008.
The following texts offer superb treatments of organizational design.
Brickley, J. A., C. W. Smith, and J. L. Zimmerman. Managerial Economics and Organizational Archi-
tecture.Chicago: McGraw-Hill, 2008.
Milgrom, P., and J. Roberts. Economics, Organization and Management.Englewood Cliffs, NJ: Prentice-
Hall, 1992.
An interesting place to begin an Internet search is Erik Brynjolfsson’s home page (with links to research on orga-
nizational structure and information technology):http://ebusiness.mit.edu/erik.624 Chapter 14 Asymmetric Information and Organizational DesignCHECK STATION
ANSWERS- A used-car dealer faces two types of adverse selection problems. First,
the dealer is in the business of buying cars and must take care to avoid
low-quality vehicles. Thus, it is wise to have staff mechanics to inspect
vehicles before purchase. The dealer must also sell used cars to the
suspecting public. By developing a good reputation and by offering
warranties, the dealer can mitigate these adverse selection problems
as well. - Under capitation, after being paid its up-front fees, the physicians’
group pays for all costs. Therefore, it has the strongest possible incentive
to practice preventive care (provided, of course, that it is cost-effective).
A possible problem with this approach is the presence of adverse
selection. A doctors’ group has an incentive to enlist the healthiest
segments of the population and to turn its back on those in poor health.
Under capitation, doctors face substantial financial risks. (At the end of
the year, the costs paid out may exceed the capitation revenues
received.) This raises a new moral hazard problem. Heightened cost
incentives might induce doctors to compromise the quality of care (to
maintain their incomes). - Optimizing the size of a team involves trading off the marginal benefits of
adding another member (another perspective and source of
information) against the additional cost. Besides the cost in human
resources, added costs would include the difficulty in communicating and
reaching consensus and the heightening of free-rider problems. As
always, the optimal trade-off occurs where MB MC. - Suppose the worker’s profit share is exactly 60 percent. Now if the worker
changes from medium effort to high effort, his expected compensation
increases by (.6)(85,000 75,000) $6,000, according to Table 14.3.
The resulting change in disutility is 45,000 39,000 $6,000. Thus, the
worker is exactly indifferent to exerting the extra effort. Raising the
c14AsymmetricInformationandOrganizationalDesign.qxd 9/26/11 11:03 AM Page 624