Institutions_Field_Exam_Aug_09

Institutions Field Exam August  Instructions Answer both questions. The two ques- tions count equally. There are two pages to the exam ( i.e., Question 2 continues to the next page). Question 1: A Multi-Task Theory of Bureaucracies Using Holmstrom and Milgrom’s (1991, 1994) multi-task principal agent frame- work, develop a model of government organizations that could be applied to government agencies— such as the State Department. In answering this ques- tion, (a) Discuss the key differences between government and private organizations. (b) Describe in detail the Holmstrom & Milgrom framework as developed originally. (c) Describe how, and why, you would modify the Holmstrom & Milgrom framework so as to capture the essence of government agencies as discussed in (a). In doing so, describe in detail the set of assumptions— i.e., players, information set, actions, and equilibrium concept that you need so as to develop a theory of public bureaucracies. (d) Without attempting to solve your model formally, describe what you be- lieve will be the empirical implications of such a model. Question 2: Joint Venture Consider the following scenario. Two profit-maximizing firms wish to engage in a joint venture. The profit from the joint venture (gross of investments) is π ( I 1 , I 2 ), where I n is the amount of money firm n invests in the joint venture. Assume the function π ( · , · ) is symmetric ( i.e., π ( I, J ) = π ( J, I )), at least twice differentiable in all arguments, and exhibits the following properties: • ∂π (0 , I 2 ) /∂I 1 > 1 for all I 2 and ∂π ( I 1 , I 2 ) /∂I 1 > 0 for all I 1 and I 2 (observe, by symmetry, the same properties hold when I 1 and I 2 are in- terchanged). • There exists an ¯ I , finite, such that ∂π ( I, I ) /∂I 1 + ∂π ( I, I ) /∂I 2 < 2 for all I > ¯ I . 1