Explain the three dimensions of uncertainty which affects the choice among markets, contracts, and integration
Uncertainty affects the choice among markets, contracts, and integration because the ability to control and shift risk will vary with that choice. At least three dimensions of uncertainty can matter. First is its importance—the choice will vary with the probability of a loss and its expected size. Second are the possibilities for reducing ("mitigating") a possible loss, for example, by purchasing insurance or constructing a backup plan with an alternative partner. Third is the dimensionality of the risk. It is relatively easy to write a service contract with liquidated damages for a leased machine that can fail in only one way. If a machine can fail in many ways (and both you and I can take actions that affect the probability of failure), a contract to allocate the repair costs between us may be so costly to write and enforce that vertical integration that puts all responsibility on the owner may be superior.
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In economics, the practical application of an invention is known as
A) innovation. B) entrepreneurship. C) physical capital. D) technology.
Transfer payments are payments that are:
A. made in market transactions in order to get the seller to transfer the goods or services to the buyer. B. made in order to obtain public goods or services. C. payments made to households that can then be spent by the households. D. made to firms in order to transfer goods and services to the government.
A year-long drought that destroys most wheat crops for the season would shift the:
A. short-run aggregate supply curve only. B. aggregate demand curve only. C. aggregate demand curve, and the short-run aggregate supply curve would shift in response. D. short-run aggregate supply curve and the long-run aggregate supply curve.
The theory that there are no predictable trends in securities prices that can be used to "get rich quick" is the
A) dartboard theory. B) random walk theory. C) Wall Street theory. D) inefficient market hypothesis.