WPC 480 FINAL COMPLETE TEST PAPER WITH
CORRECT ANSWERS
◉ Opportunism
Answer: Willingness of at least some people to take advantage of
others
Dishonesty
◉ Threat of Opportunism
Answer: Greatest when there is an asset specificity problem
(i.e. transaction specific investment)
◉ Asset Specificity
Answer: Unique assets with high opportunity cost - significantly
more value in their intended us than in their next-best use
Ex. site specificity, physical asset specificity, human asset specificity
◉ Asset Specificity Examples
Answer: Oil refinery & oil pipeline
,Auto parts & auto assembly
◉ Benefits of vertical integration:
Answer: Reduces opportunism
Facilitates investments in specialized assets
Facilitates scheduling and planning
Secures critical supplies and distribution channels
Leverage R&Cs
Uses fiats and authority
◉ Risks of Vertical Integration
Answer: Integration costs
Increase in the potential for legal repercussions
Reduction in flexibility
,◉ VI - Integration Costs
Answer: Integration cos must be less than opportunism cost
◉ Firm vs. Market (Make or buy)
Answer: Firm-Advantage
Firm-Disadvantage
Market-Advantage
Market-Disadvantage
◉ Firm-Advantage
Answer: Command and control - fiat, hierarchical lines of authority
Coordination
Transaction-Specific Investments
Community of knowledge
, ◉ Firm-Disadvantage
Answer: Administrative Costs
Low-powered incentives
Principal-agent problems
Initial Investment
Less flexibility
◉ Market-Advantages
Answer: High-powered incentives
Flexibility especially under high uncertainty
Utilizing market specialty (i.e. pick the winner; price mechanism
◉ Market-Disadvantages
Answer: Search costs
CORRECT ANSWERS
◉ Opportunism
Answer: Willingness of at least some people to take advantage of
others
Dishonesty
◉ Threat of Opportunism
Answer: Greatest when there is an asset specificity problem
(i.e. transaction specific investment)
◉ Asset Specificity
Answer: Unique assets with high opportunity cost - significantly
more value in their intended us than in their next-best use
Ex. site specificity, physical asset specificity, human asset specificity
◉ Asset Specificity Examples
Answer: Oil refinery & oil pipeline
,Auto parts & auto assembly
◉ Benefits of vertical integration:
Answer: Reduces opportunism
Facilitates investments in specialized assets
Facilitates scheduling and planning
Secures critical supplies and distribution channels
Leverage R&Cs
Uses fiats and authority
◉ Risks of Vertical Integration
Answer: Integration costs
Increase in the potential for legal repercussions
Reduction in flexibility
,◉ VI - Integration Costs
Answer: Integration cos must be less than opportunism cost
◉ Firm vs. Market (Make or buy)
Answer: Firm-Advantage
Firm-Disadvantage
Market-Advantage
Market-Disadvantage
◉ Firm-Advantage
Answer: Command and control - fiat, hierarchical lines of authority
Coordination
Transaction-Specific Investments
Community of knowledge
, ◉ Firm-Disadvantage
Answer: Administrative Costs
Low-powered incentives
Principal-agent problems
Initial Investment
Less flexibility
◉ Market-Advantages
Answer: High-powered incentives
Flexibility especially under high uncertainty
Utilizing market specialty (i.e. pick the winner; price mechanism
◉ Market-Disadvantages
Answer: Search costs
