Case Study 2 (due in 16 hours)
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ECO 550 2019
Welcome to
ECO 550
Managerial Economics
Overview of the Agenda
Asymmetric Information, Signaling and Screening
Preparation Final Case Study
Q&A
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Third Winner 2001
Michael Spence identified an important form of adjustment by individual market participants, where the better informed take costly actions in an attempt to improve on their market outcome by credibly transmitting information to the poorly informed. Spence showed when such signaling will actually work. While his own research emphasized education as a productivity signal in job markets, subsequent research has suggested many other applications, e.g., how firms may use dividends to signal their profitability to agents in the stock market.
ECO 550 Managerial Economics
Week 8: Preparation for Case Study 2
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Eco 550 Summer 2018
Agenda: Table of Contents
Risk versus Uncertainty
Follow the Bread Crumbs: Feedback
Week 6-8 discussions
Where to Start
What Is Expected
If you have questions during the week,
remember to ask Us!
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Risk versus Uncertainty
Frank H. Knight, University of Chicago, Risk, Uncertainty and Profit, 1921.
Risk is measurable i.e. it can be calculate in the form of a tangible measure of probability. Using estimates of risk, one can make a reasonable estimate of both profit and loss. The risk in the entrant game in the week 6 discussion is quantifiable risk.
Uncertainty, risks which are not quantifiable, such as in the HR problem in week 7, the risk here arises because of unknowable elements which effect perceptions. Uncertainty arises as problems with information. Informational uncertainty is particularly problematic when agents are risk averse.
In the week 8 discussion we are looking at asymmetric information, signaling (one solution to the problem) and screening (another solution to the problem)
Understanding these three discussions are the foundation of final writing assignment.
View the Feedback Videos: Instructor Insights
Feedback week 6, Managing Risk, see the week 6 page.
Feedback week 7, Understanding Risk versus Uncertainty, which includes the issue of coping with risk aversion, see the week 7 page.
Feedback week 8, Asymmetric Information, Moral Hazard and Adverse Selection, Problems and Remedies, see the week 8 page.
Feedback week 9, Corporate Governance the Key to Managing Incentives that Work. I have placed this on the week 9 page early.
Other helpful video:
Look back to review the Porter’s Five Forces, week 4.
On the week 8 page there are five videos on asymmetric information, moral hazard, and remedies for both. Plus make sure you watch the video on the week 8 discussion feedback.
In week 9 there is a great video to help you understand the agent/principle relationship and the agency problem.
The Assignment
Second Case Study
Select a company of your choice, any company but Southwest Airlines, and write a six to eight (6-8) page paper in which you:
Evaluate a company’s recent (with in the last year) actions dealing with risk and uncertainty.
Offer advice for improving risk management.
Examine an adverse selection problem your company is facing and recommend how it should minimize its negative impact on transactions.
Determine the ways your company is dealing with the moral hazard problem and suggest best practices used in the industry to deal with it.
Identify a principal-agent problem in your company and evaluate the tools it uses to align incentives and improve profitability.
Examine the organizational structure of your company and suggests ways it can be changed to improve the overall profitability.
Use at least five (5) quality academic resources in this assignment. Note: One of your references regarding your should have been published within the last 6 months. Note: Wikipedia does not qualify as an academic resource.
Your assignment must follow these formatting requirements:
Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
Where to Start: Company/Event
Pick a company, that has or is facing a challenge: damaged CEOs bad behavior and bad corporate cultures; Facebook, et.al, the challenge of potential regulation; Amazon, HQ2*2! and now reconsidered; Where will Ford Produce the Fusion, trade war fallout; will GE survive… Will Lyft go public
Critical Next Step
Learn what the company says – and the best place to learn about that is the company’s investor’s page. They usually present an assessment of risks, opportunities and challenges as usually explain some strategy. Note, this will be one of your primary references.
Second, you might want to think back to Porter’s Five Forces, what industry is your company in and what are the challenges facing that industry?
Remember the Following
Froeb’s forensic rules:
Who made the bad decision or who will be making a potentially risky decision?
Did/does the decisionmaker have enough information to make the right decision?
Did/does the decisionmaker have the incentive to make the right decision?
Remember Froeb’s Problem Solving Tips
Avoid the temptation to think of the problem as belonging to the employee, think about the problem as belonging to the organization?
To solve the problem, look ahead and reason back, what caused/what may cause the bad decision
Are there unintended consequences in you proposed solution
Questions 1 and 2
1.Within the last year, discuss the company’s actions dealing with risk and uncertainty, and 2 offer advice in risk management.
a) What is the difference between risk and uncertainty? You must explain these concepts in your answer.
Question 3
Examine an adverse selection problem your company (meaning the company you selected) is facing and recommend how it should minimize its negative impact.
a) Make sure you define adverse selection. It is always best to include a simple example. Make it your own.
Question 4
Determine the ways your company is dealing with moral hazard and suggest best practices used in the industry to deal with moral hazard.
a) Make sure you explain moral hazard. It is always best to include a simple example. Make it your own.
Question 5
Identify a principle-agent problem in your company and evaluate the tools it uses to align incentives and improve profits.
a) Explain the principle-agent problem. Again give a simple example. Base it on your experience.
Question 6
Examine the organizational structure of your company and suggest ways it can be changed to improve overall profitability.
References and Referencing
Where to find the story of a business: Good sources for a current unfolding story are in fact news and business journals. While this may be a starting point, remember they are only reporting on what they have heard. You must go to the primary source for evidence. AND THAT PRIMARY SOURCE WILL BE INFORMATION/INTERVIEWS ETC BY COMPANY LEADERS AND REMEMBER THE INVESTOR PAGE
Articles will always tell you the source of the story, go there and verify.
Summarize and cite. Make sure the reader never has to ask the question, which source was used here.
Remember, every fact must have an in-text cite as to the source.
If You Google You Will Find What Everyone Else Finds
Use the Professional Business Publications Available in the Online Library
Reference and Citation
You must list all references on which you relied, even if it was from a previous course.
The reader should never have to wonder which reference was the source. In-text cite is required when you even broadly summarize any work.
In-text cite is required when every you give a fact.
Reference Quality
You need 5 academic quality references. We are dealing with a recent within the last six months event.
Old in business is 5 years.
Academic quality: either primary source, i.e. directly from the company, directly from a government agency, or, a peer reviewed publication.
Never use Investopedia, Wikipedia or any other pedia in an professional or academic work.
Submission
Use Grammarly to check, edit and vet your handling or sources and citation.
You will have only 1 submission on SafeAssign. If you are below 10% you are fine.
Resolve the problems before you submit.
Other Recommendations
Do not use the questions as the section heads. Do not repeat the questions in the paper.
Avoid direct quotes unless that are absolutely necessary to credibility.
If SafeAssign says a sentence or group of sentences are from another source, re-write in your own words.
Do not use any font other than Time New Roman 12
Do not fancy templates
Do not share your work product with others, certainly discuss ideas, but never share your work product in part or whole
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ECO 550 2019
Questions & Answers
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