Week 6: Torts, the Samurai and Dance of Joy

Stanford GSB Sloan Study Notes, Week 6, Summer quarter

Pages assigned for reading: 157

POLECON239 – Strategy Beyond Markets (prof Jha)

  • Tort anecdotes:
    • The famous 1992 case where jury awarded $2.7M to Stella Riebeck who was burned by McDonald’s coffee she spilled…
      • In class discussion: “This could not happen in Italy. a) espressos are smaller and b) when you spill coffee on yourself, you say “I am stupid” and move on”
    • A Batman costume manufacturer needs to add labels with: “Parents, please exercise caution, cape does not enable users to fly”
    • When Vespa scooters with a storage compartment under the seat are produced, only the ones sent to US market get a warning label: “do not store babies or pets under the seat”

  • Coarse Theorem
    • externalities are reciprocal (two parties required)
    • Protection of entitlements:
      • property rule: don’t infringe an entitlement without the holder’s consent
      • liability rule: can interfere with another party, but expect to compensate any damages
    • Liability rules lower the transaction costs for protection
      • Ex: would be prohibitively expensive to negotiate agreements between every motorist, every other motorist and all pedestrians regarding compensations for injuries per property rule
      • Make sure the person most easy to adjust does adjust for social efficiency
  • Common law looks to what people do and want to do to arrange and complete exchanges
    • Contracts are one means to arrange mutually advantageous (as they have been bargained) trades
    • Torts: civil wrongs (done by one person to another).
      • US tort system cost $246B in 2003 ($843/person; was $12/person in 1950!)
    • Class action lawsuits are consolidation of similar torts.
  • MTN Group case (African mobile operator)
    • In $2/day income areas the $30 cost of even the cheapest Motorola phones was so prohibitive that some operators set up “telephone ladies” that rented their handsets one call and one customer at a time
    • Nokia Siemens Networks experimented with a model where a local entrepreneur or village owned a module base station, handling service and billings
  • Disruptive innovation
    • affect future bargaining power of incumbents
    • (in incumbents mind) better to block today (no matter what the societal good lost) than to fight in the future when disruptors are already strong
  • Revolution tipping points
    • 1977 CIA study finds Iran “an island of stability in a sea of turbulence”… demonstrations begin in October 1977… (Kuran, “Sparks and Prairie Fires”, Public Choice 1995)
    • The propagation curve between actual and expected public opinions is rarely a straight line, more like a wave
      • E.g at any given time, the seemingly quiet public opinion might be misleading about how passionately people actually feel about some topic
  • Japan dissolved the Samurai caste quite peacefully in 1867-80
    • 1.8M samurai -> yet only 30k end up fighting? (think the Last Samurai movie)
    • Solution to let steam out: 311k ex-samurai receive public bond forth 113M Yen, in return of giving up their rice monopoly and some other things
    • Bank owners required to capitalise their banks 80% from these bonds and 20% from cash (from commoners)
    • Number of banks grows 7 -> 150
    • Violent samurai revolts end, bank ownership aligns incentives of samurai credibly with society against political risk (they become big supporters of popular rights movements)
  • French Revolution, Iraq, post-1815 struggle with similar pattern of problems created by large amounts of well trained men returning from battlefield and willing to take aggressive positions (up to bloodshed) with regards to any problems at home
    • Big issue: releasing tension requires credible commitment, but to whom?
      • 300k Post-Napoleonic war veterans return to UK, temporary threat of revolution… until UK extend the right to vote in 1832. Large, democratic force of the raising poor: credible force to commit to.
      • As an opposite example: disbanding the Iraq Army in 2003. For solution the sunni soldiers would need to commit to the Shia minority to stand for their wellbeing?
  • Practical issues to consider when picking a geographic location when there is a risk of public opposition (Tata Nano plant case in India)
    • When a small location is close to major centers, it is much easier for one side to recruit celebrities and high profile backers (like top party leaders). “Can show your support in front of cameras… and be home for dinner!”
    • Ruling party usually drives you to their marginal (barely win) consituencies with incentives, etc, to show progress to locals and increase the lead over their political competition
    • At the same time, the political opposition is much more willing to attack your project aggressively – because they are only marginally behind in elections and could tilt the balance with high-profile “win” over you

MGTECON209 – Statistics & Economics (prof Oyer)

  • Some questions that rose while reading:
    • why is the indifference curve of perfect complements a right angle? why not just a vertical line?
    • if an utility function “is a concept” that “doesn’t exist in fundamental sense”, why do the calculations (like marginal utility) work? especially if utility values are mostly ordinal (relative value to each-other?)
    • what’s the difference between Marginal Rate of Substitution & MR of Transormation? if the consumer is operating on full budget, these would be the same? is it that MRS is price agnostic (focused on good’s utility only)?
  • $1 increase in gas price in US increased the market share of the most fuel-efficient cars quartile by 20%, and reduced the least efficient car’s by 24%. (Zettelmeyer 2009)
  • Reason why “more is better” principle can be assumed in demand analysis: we do not observe the consumers who believe “less is more” (say from some quantity forward) among those making purchases
  • Vocabulary class:
    • ordinal measure: one that tells us the relative ranking of two things, but not by how much more one outranks the other (ex: letter grades, A > B)
    • cardinal measure: one that makes absolute comparisons (ex: money, $150 > $50 by $100)
    • convex: downward-sloping curve that curves “away” from zero
    • concave: downward-sloping curve that “circles around” zero
  • US food stamp program SNAP (supplemental nutrition assistance program to provide food purchasing coupons for the poor) covers $40M people for $73B (2010).
    • In 2009 recession, fed 1/8 Americans & 1/4 children.
    • Yet for the stigma of “being poor” when presenting the stamps for payment and other reasons, this is just 2/3 of eligible targets
    • Economists in ongoing argument if cash (without limitation to spend just on food) would increase or decrease the intended nutrition effects
      • given that the overall utility would stay the same or go up (people could buy other things they want & need – or still just food if that is the max utility for them)
      • Whitmore (2002) even concluded cash would reduce their odds of obesity (cheapest calories)
    • Classic example where positive (scientific) answer might not match the normative (value judgement) answer – e.g the perceived risk of misjudgement by poor to buy drugs & booze instead of food.
  • Definition of “goods” is notlimited to consumption, passing resources to someone else’s possession in exchange for something
    • “savings” are just another a good.
  • Definition of “short” and “long” in economics: is there enough time to change all the inputs of a function (long run) or at least one of them practically needs to remain fixed as is (short run)
  • Legal structure of a firm determines who is liable for its debts. Effect of limited liability (e.g higher willingness to risk) In 2010 in US:
    • LL corporations are 19% of all non farm firms, yet took home 83% sales & 67% profits
    • Nonfarm sole proprietorships are 72% of all firms, but 4% of sales & 10% of net income
    • Partnerships 10% of firms, 13% of sales, 23% of income
  • On innovation:
    • Max number of miles the most effective Ford model could drive on a gallon of gas in 2003: 36
    • Ford Model T in 1912: 35 miles
  • Relationship between sunk cost opportunity cost: If specialised equipment was bought for $25k and can be resold for $10k, then $15k of original expenditure is sunk and $10k the opportunity cost.
  • Franchise tax aka business licence fee – one year licence to sell hot dogs in front of Metropolitan in NYC: $642,701 in 2009
  • Labor & leisure can be thought of as consumption goods that get traded off against other goods
    • Alternatively, in labor context you could say your personal productive output is a “bad”, because more of it means less of leisure
  • All production functions have a region where returns to scale are increasing, and region where they are decreasing
    • If they didn’t, we’d see infinite size factories or all of them ending up zero-size?

OB289 – Negotiations (prof Neale)

  • Proposing multiple alternative bundles is by definition sharing informationto the other side
    • “would you take 1A + 1B or rather 2A + 0.2B” shows the relative value of A vs B you perceive
    • especially true with bundle component pairs, gets more obfuscated with multiple variables (ex: salary + bonus percentage + sign off bonus + vacation days)
  • Contingency contracts
    • Often better to bet on uncertain events rather than argue about them. Differences of opinion about future events don’t need to be bridged during negotiations, but become central to the contract.
    • Parties have different expectations about the future. They are both so confident in their prediction, or so suspicious of the other side’s forecast, that they refuse to compromise. As the negotiations progress, the difference of opinion comes to dominate the discussions, common interest forgotten & deal doesn’t happen.
    • Ex: if A thinks deal value is $40m (B thinks $14m) and wants 50% share: offer B $9m fixed + 80% of profit above that
      • Even if B doesn’t believe in the utopian scenario, they take large share of their belief home for sure + would not look entirely moronic should the top estimate happen by a miracle
    • Still, contingencies only tend to happen if there is not enough trust and alignment between parties
      • likely one side will loose (in our ex: the future is never both $14m & $40m scenario)
  • Ill-constrained cooperation can be as damaging as unconstrained competitiveness
  • Reasonable people do reject objectively valuable options if they believe they have been treated unfairly
  • Power is usually derived from situational context, not personalities, etc
    • High power negotiation parties are optimistic, action oriented, with broad vision of future…
      • …but also overconfident risk takers with illusion of control
    • Bias to action: high power players give orders for others to deliver on
    • Insensitivity to social nuance: not conscious action, but rather lack of sensitive filters when treating other players
    • Objectification of those around them as means to their ends
      • Experiment: if a peer does another person a favour, the other party feels “dept” to be repaid. If an employee does a favour to a boss, the boss considers it “just part of the job” with no debt.
  • In multiparty negotiations, let your strongest (highest power) ally do the fighting
  • Relationships can become barriers to outcome because goals other than value maximisation may become dominant
    • Comparing strangers, co-workers & couples in dealmaking, the co-workers proved to me most efficient when creating value
      • Strangers optimize for short-term gain
      • Couples optimise for long-term relationship
      • Co-workers balance, to get max gain without hurting the relationship
  • FINAL WORDS:
    • Never do a dance of joy in public.

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