Sunday, October 18, 2009

Trade-off of the Day: the economics of bargaining.

From the Scientific Background paper for this year's Nobel Prize in Economics:

Organizing the transaction within a firm centralizes decision rights, thereby saving on bargaining costs and reducing the risk of bargaining impasse, but at the same time allows executives more scope to extract rents in inefficient ways. The net effect of this trade-off depends on both the difficulty of writing useful contracts ex ante and the extent to which assets are relationship-specific ex post.

A common trade-off in a control system. It would make a good case study: trade-off -> dilemma -> solution (separation in time and, probably, action).

tags: trade-off, economics, control, dilemma, problem, example, course

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