BPP Field Exam 2010

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Question B1: Work in Teams

There are N employees at Yahoo. Employees can either work,[math]e = 1[/math], or shirk, e=0. It costs a worker 1 dollar to work and zero dollars to shirk. Working or not cannot be monitored by the firm. For each unit of work, the firm earns z dollars where 1 < z < N. All workers have an outside option of working at Wendy's across the street and earning zero. Work/shirk decisions are made simultaneously.

1. Suppose that Yahoo is run as a commune. In that case, each worker i is awarded a share [math]s_i \gt 0[/math] of the profits where [math]∑ si = 1[/math]. How much work will get done at Yahoo under the optimal communal scheme?

2. Carol Bartz, CEO of Yahoo, decides that the commune strategy isn't work- ing. She (credibly) threatens to burn some of Yahoo's profits if performance targets are not met. Derive an optimal scheme. (Assume everyone is risk- neutral and pick your favorite equilibrium.) Is this really any better than the commune arrangement?

3. The Board of Directors does not approve of Carol's wasteful money burning scheme. Fortunately, Carol knows that her employees all have CARA preferences with an identical risk-aversion parameter, ρ. She proposes a clever new scheme to get all the Yahoos to work. What is it?

Question C1: Agenda Control and Status Quo

In many political and business settings, control over the agenda of policy changes is a potentially important institutional power, playing a significant role in determining policy outcomes. One type of agenda control (explored extensively by Cox and McCubbins in legislative settings) is negative agenda control, or gatekeeping: the ability to keep things off the agenda, and thus ensuring that the status quo is maintained. This question asks you to explore the relationship between negative agenda control and partisan politics within a legislative setting

Part A. According to the Cox and McCubbins, in the US House of Representatives (and in many legislatures around the world), the majority party has negative agenda control, but the minority party does not. Moreover, it has been posited that when the majority party fails to use its agenda control powers, congressional policy making is not partisan but instead is majoritarian.

(i) Formulate a model that captures the central features of Cox and McCubbins’ thesis as described above, being specific about all of the elements of the model.

(ii) Posit an empirically testable set of predictions from the model and prove why they hold. (Hint: consider absolute and relative rates at which laws pass the Congress when a particular party prefers the status quo).

Part B. Now consider an alternative institutional arrangement under consideration: that the Executive (president) can decree a policy that will be implemented at some cost to the executive. This is a common feature in many presidential systems (e.g. in a number of Latin American democracies).

(iii) Explain how you would modify your model in Part A to account for executive decree authority.

(iv) How would your predictions in part A(ii) above change. Prove your results.