Chapter 6—Market Failures and Incentive Issues Inside the Firm
Key
1. Public goods are goods that have
2. Goods that cannot be consumed without excluding other consumers are
3. Businesses often center production activities around
4. Economists would largely motivate employees by appealing to their
5. Subjective evaluations
6. By being responsible for their actions
7. A problem associated with the principal-agent relationship is
8. Moral hazard is associated with
10. Being paid a wage more than your opportunity costs is an example of
11. A difference between the efficiency wage and the opportunity cost of labor is largely determined by
12. A wage profile rises because
13. When employees are paid more than their worth when they are hired and less than their worth near
retirement
14. Backloaded compensation encourages
15. If a firm invests a lot in new employees, it is likely to
16. A flat wage profile refers to
17. To avoid wage compression,
18. Lincoln Electric paid employees on the basis of
19. A piecework wage compensation may be used if productivity
20. A problem with teams is that individuals
21. Free riding is a problem
22. Ways to address free riding include
23. Risk-sharing forms of compensation are beneficial if employee are
24. After people buy insurance, they are more likely to build a beach house out of wood framing rather than
25. The income of managers is often ____ diversified compared to the income of stockholders.
26. A common way used to align the interests of managers with the interests of equity holders is
27. Often managers require a payment due to their risk aversion. This payment is called
28. The board of directors and the CEO
29. If job promotion is viewed as a contest, then
30. If initially an individuals’ compensation is less than their productivity but the reverse is true, the individual
31. Agents hire principals.
32. Principals need to monitor agents.
33. Moral hazard arises when principals find it costly to monitor agents.
34. If I am paid a wage below my opportunity cost, I am being paid an efficiency wage.
35. Backloaded compensation makes the wage profile increase at a decreasing rate.
36. If older employees are being paid less than their value to the firm, their compensation is being backloaded.
37. If a wage profile is relatively flat, wage compression may be present.
38. Lincoln Electric used backloaded compensation.
39. Piecework compensation plans are useful when productivity is difficult to measure.
40. Free riding can be found in team structures.
41. If team members are able to evaluate other team members, then free riding can be minimized.
42. Some people argue that limiting a CEO’s pay may be a way to create good incentives.
43. Individuals cannot be excluded from consuming a public good.
44. Free-riding is linked to an absence of monitoring behavior.
45. Tournaments are used to identify the most productive person or the best player.