Summary 619highly publicized case, Sears announced that its sales staff would no
longer be paid on commission.
a. In your view, were the abuses by the mechanics a result of adverse
selection, moral hazard, or both?
b. The management of Sears stated that it was unaware of the abuses.
What are the incentives for management to monitor its employees to
prevent such wrongdoing?
c. What is the disadvantage of ending the commission system?- Suppose prospective clerical workers fall into one of two categories in
equal numbers: high productivity (HP) and low productivity (LP). An
HP worker’s value to the firm is $30,000 per year; an LP worker’s value is
$20,000 per year. A firm hires workers who stay an average of five years.
a. At the time of hiring, the firm cannot distinguish HP and LP workers.
In this case, what wage will it offer its new hires?
b. One option is for workers to attend college before taking a job.
Suppose college has no effect on clerical productivity (its other virtues
notwithstanding). For an HP worker, the expected total cost of
attending a four-year college (accounting for possible scholarships) is
$40,000. The expected cost for an LP worker is $60,000. Can HP
workers effectively signal their productivity by attending college? What
if the average job stay is only three years? - As a benefit to employees, many universities offer their clerical and
administrative employees free tuition for themselves and their families. Why
might universities prefer this to simply offering the employees more money? - Five couples are having dinner at a fancy French restaurant. They expect
that the total dinner bill will be split evenly five ways. How might this
prior knowledge affect the diners’ menu selections? (What if one couple
mistakenly believes there are to be separate checks?) - Each year, almost 200,000 men are diagnosed with prostate cancer.
Decision making is complicated because there are up to five potential
treatments, ranging from aggressive surgery to radiation to “watchful
waiting” (that is, carefully monitoring slow-growing cancers). One recently
developed treatment is IMRT, a sophisticated technology that delivers
radiation to kill and (hopefully) eliminate cancerous cells. The treatment
mainly takes place in hospitals that are reimbursed by insurance programs.
However, in more than a dozen states, private urology practices have
emerged that not only diagnose and advise patients, but also own IMRT
equipment and hire radiologists to administer the treatment. These
practices are reimbursed by private insurers and Medicaid.
a. Private urologists cite the advantages of their carrying out IMRT.
What kinds of advantages are possible?
b. Citing IMRT’s high cost, critics claim that putting IMRT in private
urologists’ hands is leading to cost escalation. Why might this be the
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