MANAGERIAL DECISION MAKING

Study Guide for Test 3

Chapter 15

You will need to know about the impact of asymmetric information on decision making and organizational design.  Specifically, you need to know:

1.  How adverse selection impacts decision making

2.  How signaling can be employed by both the informed and the uninformed parties

3.  How moral hazard impacts decision making

4.  The factors that determine whether an activity should be done in-house or outsourced

5.  The factors that determine whether decision-making responsibilities should be centralized or decentralized

6.  How an optimal contract can be implemented if a worker's effort is observable

7.  How incentives can be structured to improve a worker's effort if it is not observable

8.  The pros and cons of basing compensation on group results

9.  The actions that can be taken to limit the power of top management in an organization

Chapter 16

You will need to know about the appropriate decisions in the context of bargaining and negotiation.  Specifically, you need to know:

1.  How the zone of agreement, including the size, is determined

2.  How differences in probability assessments could lead to differences in values (valuation) for assets

3.  How differences in risk aversion could lead to differences in values (valuation) for assets

4.  How risk sharing can be used when two parties are risk averse

5.  How contingent contracts can be used to facilitate agreements

6.  How an optimal agreement is reached in multiple-issue negotiations

7.  How an efficient agreement can be reached when there is perfect information

Chapter 17

You will need to know about the appropriate decisions involving auctions and competitive bidding.  Specifically, you need to know:

1.  The different types of auctions that can be used

2.  What the appropriate strategy is in English and Vickrey auctions

3.  How is the optimal bid is determined in sealed-bid and Dutch auctions

4.  How the probability of winning with different bids is determined when there are multiple bidders distributed uniformly over a range of values

5.  How the Winner's Curse affects bidding in an auction

6.  How the expected maximum and second highest values are determined

7.  The circumstances that would lead to higher bids and revenue for English auctions vs. sealed-bid auctions

8.  The impact of using reserve prices in an auction

9.  How are contingent contracts are used in a competitive procurement situation