Thursday, December 6, 2012

Class in Review

Class in Review
This class is bar none one of the most worthwhile I have taken at U of I. I've learned many theories and topics that were not only new to me but certainly applicable and useful in the workplace. Each unit contained several ideas that provided me with a new perspective to view the operations of organizations and general microeconomic activity. The topic I found most interesting was the discussion of the Argyris and Schon Models I and II. I had never heard of these models prior to the course but they both articulated issues that I have experienced in past jobs and such. They are able to create a standard with which I could evaluate conflict in my dealings within organizations. The quantitative approach to moral hazard was another topic I found very useful and interesting. Our in-depth coverage of moral hazard provided me with a comprehensive understanding of a topic I had little knowledge of prior to the class. Transfer prices and transaction costs were new to me as well, and these topics seem extremely practical and important to understand in the business world.

The blogging that we do in this class was the first type of activity of its kind I've engaged in at college and I think it was extremely effective. Personally, it allowed me to apply advanced economic concepts to my personal interactions and past experiences in order for me to understand them better. The casual setting of the blogs also helped me understand the topics in a more full manner. Lectures were also valuable but one aspect I wish was different was that I would have preferred more lively discussion and interactivity within class. The casual aspect of the blogs was very beneficial to me and I would have enjoyed that aspect with in-class discussions as well.

The excel spreadsheets were another aspect of the course I was impressed. They succeeded in breaking down advanced technical concepts into more simple parts and then bringing those parts together. However, towards the end of the class the math began getting a little complicated for me. I do not have the strongest background but I do have a substantial one and beginning in the moral hazard unit, the equations and derivations of equations that were introduced were beyond my full understanding, which was disappointing because I thought the quantitative approach to these topics was very interesting.

Overall the course was my favorite and most worthwhile that I have taken at U of I and I believe the course structure was very appropriate and beneficial.

Thursday, November 29, 2012

Personal Reputation

Personal Reputation
I would like to think I have a strong reputation in a certain student organization I am involved with. I have held several officer positions in the group and have worked to earn a name for myself as a hard-worker and a solid leader. I worked very hard to start developing this reputation. Originally I saw a position in the group that I wanted to hold because I believed I could be effective in developing the organization through it. However, I did not have much experience required and there were others who were interested as well. I began to take things into my own hands and set up and organized various group events that were very successul. This quickly developed a reputation as someone who was effective and driven. I had specific goals that I wanted to achieve, and I achieved them in a reasonable time frame.

After I had developed a solid reputation I needed to enhance it. I needed to solidify my abilities and show the group that my successes were not exceptions but the norm. I worked hard for several months in accomplishing this goal and brought several innovations to the way things were run in the group. When officer elections came around, I was a shoe-in for the position that I had desired and everyone was satisfied with the outcome of the election. Now that I had won the position I had a mandate from the group's members to carry out my promises and maintain the same or greater level of effort I had prior to the election.

Here is when an interesting motivation was introduced. I had achieved my main goal of getting elected to the position and along the way had developed a strong reputation. Now that I was in the position, I had all of the benefits of being in a leadership role, however I essentially controlled how much work I wanted to put in. There was certainly motivation for me to slack on projects or events I personally deemed unnecessary of a waste of time. Why should I waste my time on something that I do not whole-heartedly believe in or want to help with? Is what my rational side thought, however my social side knew that I could not let down the group that had voted for me.

I cannot think of an example in this situation in which I have "cashed in" on my reputation however there have certainly been opportunities in which I could have. Possibly using my reputation as hardworking and trustworthy to engage in a deal with someone and then double-back on the deal as long as there were no safeguards to prevent that. In this case, the utility from breaking the agreement would have to exceed the utility from maintaining it and the disutility from losing a good reputation.

Friday, November 9, 2012

The Triangular Principal-Agent Problem

The Triangular Principal-Agent Problem
To demonstrate a real-life analysis of the triangular principal-agent problem I will return to my experiences in working at the supermarket. My personal experience at the supermarket did not involve two principal agents, but all department managers experienced this. For this example I will use one of the departments I worked in, the deli. The deli manager maintained the deli department, had an assistant manager who was authorized to do much of the same duties as him, and oversaw a small staff of full-time and part-time deli workers. The deli manager acted as a principal to his staff, however he acted as an agent as he had to answer directly to two principals. One of these principals was the store manager who oversaw all departments in the specific store location. The other principal the deli manager had to answer to was the company deli coordinator. The company deli coordinator was an employee of the company of the corporate level and was in charge of the deli departments at each store location. This triangular relationship worked that the two principals were mostly independent of one another, neither had any power over the other, however they both had power over the deli manager.

The main function of the store manager as a principal to the deli manager was to ensure that department revenues were up to par, customer service initiatives were followed, and the department remained clean and presentable in accordance with the rest of the store. The deli coordinators position as a principal to the deli manager was to ensure he was following company-wide department initiatives, purchasing the right inventory, and keeping up the general success of the department. The store manager's primary concern is store-related issues whereas the deli coordinator's primary concern is corporate company wide issues. These concerns occasionally overlapped but each principal had separate methods and tools to resolve them. Because both principals often dealt with different aspects of the department's success, there was little tension between them however there would be occasions in which it would be problematic. For instance, if the number of catering orders into the deli was exceptionally high. The store manager would have the department manager put the more experienced and better workers on the catering orders as they tended to be expensive and difficult to make. This left less experienced and sometimes less qualified workers to man the deli counter and customers in the store. If the deli coordinator was to come to the store at this time he would see that the department was being poorly staffed and would direct the deli manager to rectify this. The deli manager, rather than see tension between his two principals would often fix this issue himself by managing the catering orders himself or some other inconvenient method that was acceptable to both principals.

If the deli manager wanted to strictly follow the desires of the store manager, he could hypothetically disregard the deli coordinator's initiatives in search of greater revenues and improved customer service. If he was only to follow the deli coordinator's demands then the department could end up dirty and unkempt as this is not the primary concern of the deli coordinator.

Monday, October 29, 2012

Working On A Team

Working On A Team
In this blog I will detail two experiences I have had in working on a team. The first experience was at work several years ago, it was an operation that ran very smoothly and had many people involved. The second experience was not as successful, I was on a committee for a student organization that had to organize a large event however the process did not run smoothly.

The first experience was at the supermarket where I worked, it was the day before Christmas (the day of Christmas Eve) and the company had an extremely large number of catering and pick-up orders. The company's typical procedure for catering and pick up was not designed to run on such a large scale and as such they had to adapt to a different system for the day. Many employees received roles different than they were used to or were in different departments than usual. There was a new system of supply chain in which one department would work to record orders, send them to another department for preparation, then another department would pick up the orders and put them in storage or prepare them for delivery. This was all done on a very short time frame due to the perishable nature of the product combined with a vast quantity of orders. The operation was very high-paced and the customers in this situation had very low tolerance for mistakes because it was the holidays. The company designed an excellent system to meet these demands and department managers selected apt employees to perform new roles, it mostly went off without any issues and almost all customers were satisfied except for a few difficult ones. It was certainly a stressful operation but due to the high-pace there was no time for complaining or bickering. Every department was appropriately staffed and stocked with correct inventories. Overall, it was a success but certainly a stressful and exhausting day for all the people involved.

In another experience I was involved with a project for a student organization in which I had to work on a committee to organize a large event for several hundred people. There was a short time frame in which it needed to be organized and it had many facets. First we needed to collect money from group members for the budget, we then had to plan out the schedule for the night, purchase all goods and rent out spaces, notify everyone of the plan, and finally make sure it ran smoothly the night of. Everybody on the committee had other commitments and schoolwork that week and the success of the event wasn't everyone's top priority. This was one aspect that added tension to the process. Another aspect that made it difficult was people didn't have assigned roles it was just a general planning committee. As the event got closer, it was up to us to motivate other club members to help set up the actual event which was very difficult as they did not believe they had a mandate to assist. A major source of tension was bickering over distribution of the budget and how it should've been spent. Many people disagreed on what should have been purchased and in what amounts.

In the end the event was satisfactory but it did not reach its potential. There were many issues with efficiency, budgeting, and general planning and preparation. Tensions were high and stubborn personalities did not help. The fact that the organization was more informal may have contributed to this. In a workplace setting where your job and source of income may be on the line if you fail at your task, there is much more motivation to succeed. I believe that is the primary difference between the success of the first example and the mediocrity of the second example. Many of the committee member's priorities that week were unrelated to the event and because of this it took a back-seat to most other things in their lives.

Thursday, October 18, 2012

Team Production

Team Production
I think a good example of team production relating to this article would be that of the activities of a custom automobile shop. Let's take a hypothetical example where the auto shop receives a complex order from a wealthy customer. The customer wants a special engine and transmission which requires the work of the specialized mechanic in the shop. The order also required a state-of-the-art sound system which is handled by the audio specialist. The customer desired low-profile tires and chrome rims which requires the work of the tire specialist. Lastly the customer wanted a designer interior and a custom paint job, both of which require the interior specialist and the exterior designer.

We have established 5 unique roles. The mechanic, the audio technician, the tire specialist, the interior designer, and the exterior designer. These 5 roles are unique and held by experts in their field. The customer came to them because they are the only ones who could fulfill his order. In this situation there would be no ability to outsource any work to a third party. Also, without one of these 5 men putting in their work, the product will be unfinished and the customer will unsatisfied and not purchase it. Each individual job in this case turns out to be balanced so that no worker is putting in a substantially greater amount of time or effort than any other and all of the workers have the same amount of experience in their respective field so that none of their work is more valued than another.

When it comes time to deliver the auto to the customer, he is satisfied and pays them a large check for their work. After all material expenses are subtracted each worker receives a percentage cut of the commission of the sale. All workers are satisfied with their cut and take the money happily. This is an example of what seems to be near-perfect cooperation in team production. All inputs equally value their own labor with their partners labor and the customer values their labor equally as well. In this situation it was completely necessary for all workers to cooperate to receive their cut, nobody would receive any money if not all aspects of the project were completed.

While this example seems to show that team production is fair, balanced, and maximizes total utility, there were several assumptions that were made to reach that conclusion that may not always hold. In reality, these workers may not all be perfectly equally experienced or work the same amount of time on the project and these would be major causes for a different distribution of payment that may result in inequalities.

The conclusions made in the article are somewhat similar to this because I believe this example demonstrates that income distribution will be fair in perfectly balanced circumstances but these are so rare that inequalities are bound to develop.

Wednesday, October 3, 2012

Transfer Pricing in A University Setting

Transfer Pricing in A University Setting

The concept of "Illinibucks" as a method of revenue for the University of Illinois and as a source of utility for its students is quite simple. At a large university such as the University of Illinois, a perennial problem of students is missing out on opportunities or having to wait longer periods due to the quantity of students attracted to similar things. Some examples of this include waiting for line at university dining centers, such as the Ikenberry Commons, priority for housing selection to receive placement in the public dorm of ones choice, selecting courses for the semester, making appointments with academic advisors, and scheduling appointments at Mckinley Health Center. If students had Illinibucks prepaid on their I-cards they would be able to enter the Ike through a separate line while paying a fee. For housing selection students could send in Illinibucks with their application and administrators would place their applications on the top of the pile. For appointments with academic advisors and Mckinley Health Center, students could pay a preliminary fee of Illinibucks and then have a separate appointment scheduling process in which they have priority over students who did not pay a fee.

It is unlikely that I would purchase Illinibucks if given the option. However, if I was to purchase them I would spend them when making appointments with Mckinley. In my personal experience, Mckinley has been slow and difficult to schedule with in almost all instances and if Illinibucks were to make this process easier I would consider using them for it. For the other examples I would doubtfully pay the fee for the Illinibucks as I personally do not equate enough utility with the benefits.

If the administered price of Illinibucks was too low it would attract too many students. There are two issues that could arise from this. In the dining hall line example, students pay for Illinibucks to skip the line when they don't want to wait. However, they still must pay for their meal and be checked into the dining hall, if this was to occur in a separate line, then the students using Illinibucks would have a longer line and the original purpose would be partially negated. With the Mckinley example, if many students had priority registration for appointments then non-Illinibuck students would have to be pushed out further and further creating a massive scheduling mess for Mckinley and students.

If the administered price of Illinibucks was too high the social cost and negative externality of the good would likely lead to the administration canceling the program. Many students who attend on scholarship or do not have much disposable income available to them would likely protest Illinibucks because it would allow wealthier students access to services that they are unable to access.

Thursday, September 27, 2012

Acting Opportunistically

 Acting Opportunistically
To discuss acting opportunistically I will take a relatively simple and everyday example that occurred several weeks ago. While at work I was cleaning the floors and I found a wallet on the ground. The wallet was full of cash and other valuable items. If I was acting opportunistically in this situation I would have simply taken out the cash and anything else of use and maybe even thrown the wallet out as it was then of no use from me. Through that I would have taken advantage of my circumstances; I had a choice that would have granted me benefit with essentially no downsides. However, I did not take advantage of these circumstances. I instead opted to hand the wallet in with all of its contents to my manager.

While this may be a simple example it displays the issue at hand clearly. One choice has all utility gains with essentially no losses and the choice I made wasn't clearly the optimal one. However, there were several reasons that could have compelled me to make the choice I did. One is that it was ethical, a lost wallet that had many of someone's belongings in it would have been wrong for me to take. It is private property belonging to someone else and exploiting their mistake would have been unethical. Another reason I returned the wallet to my manager could have been that it was my first shift and I was trying to prove myself as an honest and trustworthy employee. While my manager would never have known that I took the wallet, he now knows that I am honest and wouldn't do something unethical like that. So in that respect the alternative I chose did have some benefit associated without, albeit more intangible and not guaranteed, it is still present.

The several explanations for not acting opportunistically provided in the blog prompt have differences among them but they all share something similar. None of them is completely selfless although they appear to be. Each of them has some benefit attached to it, even if it is not something that can be tangibly realized. Being a "good citizen" gives a person a sense of self-righteousness, they feel better about themselves and neglect feeling any guilt that may have resulted from a different choice. They also are indirectly contributing to a healthier community, if their decision affected a small community then they may feel that contribution more. The unethical explanation is similar, the avoidance of guilt and feeling of self-righteousness are major draws to not acting in an opportunistic manner. Lastly, acting under the philosophy of "good things come to those who wait" is simply a mantra of delayed gratification. The person opting to avoid the opportunistic choice is doing such simply because they think they will receive some benefit in the future. Because of the above reasoning, I would say that each of the three possibilities share many similarities and are not all that different.

Monday, September 10, 2012

The Supermarket as an Organization

The Supermarket as an Organization
While I was a student in high school and my early years of college I worked in several departments of a chain supermarket store. This store was a locally owned regional chain that operated about 20-30 locations in a small area in New England. I was with the company for about 5 years and worked in a variety of positions and gained a solid understanding of the company's operations, at least at the retail level. 

The company was privately owned and had a clear hierarchy system. Each store had several departments. For the sake of simplicity in this post I will define three although there were many more. There was the "Front End" department, consisting of the cashiers, customer service managers, and clerks. There was a deli department in which there were associates, an assistant manager, and a manager. Also, there was a grocery department which had a similar hierarchy to the deli.

 At the store level, associates reported to assistant department managers and department managers with managers having greater oversight and flexibility. An informal hierarchy also existed between part-time associates and full-time, non-managerial associates. Full-time associates in most departments had an unspoken form of power over part-time associates. Department managers then reported to a store assistant manager and a store manager. At this point a bilateral hierarchy develops. Department managers report to store leadership as well as corporate department heads. Every department had a head at the corporate level which issued company-wide department operating procedures. In addition to corporate department heads, there are also a variety of corporate executives who managed other operations of the company. Finally, the top of the hierarchy was a company president/CEO.

There were many intricate relationships that each store maintained. Departments within every store needed to work to coordinate sales, budget, number of employees at any given time, and any issues with customers that might arise. Individual departments within any given store also needed to maintain relationships with their counterparts at other stores. For instance, if the deli department was running a sale on American cheese and experienced a higher volume of customers than projected, the department would pick up extra cheese from another store location. In order to do this a variety of transfer forms had to be filled out and the department manager would need to organize an employee to go and pick up the inventory. Individual departments needed to maintain communication with the store manager in order to develop budgets and inventories. Departments also needed to maintain relationships with their suppliers. This occurred at both the store and company level. The company would decide what brands and suppliers would be contracted by the individual stores, an example of a hub decision. The individual department managers would make decision on how much of each good to purchase every week, an example of a spoke decision. There was a large amount of autonomous decision-making at the individual department level.

One example of transaction costs that occurred at the company came in the form of coordination costs. The transaction resulting from a customer's purchase of a sale item has many coordination costs behind it. There is the cost of the company heads determining what sales to run on a given week which costs labor hours, there is the cost to the stores of setting up displays for the sale items, and there is also a large cost incurred when a store runs out of a sale item and must acquire more from another store.

Wednesday, September 5, 2012

Daniel Kahneman Introduction

Daniel Kahneman

A nobel laureate and current professor at Princeton University, Daniel Kahneman is credited with being one of developers of the field of behavioral economics. In a landmark 1979 paper on decision-making, he developed a theory as to why people will often make the less-rational decision in a given situation rather than the optimal choice. Kahneman revolutionized the field of economics by beginning to look at it not as a completely rational system, but one that was susceptible to human error and irrationality.
            Kahneman’s work was groundbreaking in combining aspects of several fields of the social sciences. By taking a multi-faceted approach to economic study he granted much greater insight into human decision-making and motivation. One of his most famous developments was his work on “prospect theory” with Amos Tversky. The theory is essentially a variation of the expected utility theory assuming conditions of risk. Through research they found that people underweight options that are merely probably as compared to options that are certain.
Before I was assigned this alias I wasn’t familiar with Kahneman; however, I have read several books centered on behavioral economics. Freakonomics and Superfreakonomics by Steven Levitt both provide an elementary look into incentives-based decision-making and actions. The aforementioned books allowed me to gain an accessible look into a quite complex branch of economics and covered interesting topics. Kahneman's work will be very relevant to the material we cover in class. Studying how humans interact and weigh choices is a large part of how organizations operate. 

 Works Cited
"Daniel Kahneman: Behavioral Economics Founder." TED: Ideas Worth Spreading. TED, n.d. Web. 5 Sep 2012.
"Prospect Theory." Behavioural Finance. N.p., n.d. Web. 5 Sep 2012. <>.