What do you get when you pay people to lie?

Exactly how does a dealer report inflated sales? 

1. To whom does the report go?
2. What are the consequences of false reports? true reports?
3. If the allegations are true, did Fiat Chrysler employees anticipate being able to keep the lies secret forever? If not, why did they encourage the dealers to lie? Note: a lie in this month's sales increases the probability the Fiat Chrysler will need another lie next month if the goal is to show continuous growth in sales.

U.S. Dealer Sues Fiat Chrysler Over Sales Reporting
by: Jeff Bennett and Eric Sylvers
Jan 15, 2016
Click here to view the full article on WSJ.com

TOPICS: Moral Hazard

SUMMARY: An Illinois dealer sued Fiat Chrysler, accusing the fastest-growing of the major auto makers of manipulating new-vehicle sales reporting in the U.S.

CLASSROOM APPLICATION: Instructors can use the article as a basis to examine the incentive of automobile manufacturers to inflate sales records and produce continually-growing sales. They can also present the incentives that manufacturers could provide to auto dealers to inflate their sales records.

QUESTIONS: 
1. (Introductory) Describe the rationale for an automobile manufacturer to provide incentives for their dealers to inflate new-vehicle sales.

2. (Introductory) Describe a method that an automobile manufacturer can use to hide payments to automobile dealers for inflating sales records.

3. (Advanced) Why would news of the Illinois dealership's suit of Fiat Chrysler negatively affect the price of the company's shares?

4. (Advanced) Define "moral hazard." Is the Fiat case described in the article an example of possible moral hazard with hidden information?

Reviewed By: James Dearden, Lehigh University

Optional material for Employment Decisions

1. Watch Charlie Chaplin in Modern Times. It shows what happens when the speed of the conveyor belt is the variable input and the number of workers is fixed.
2. Read How to ask for a raise.
3. Clifford on total and marginal product
4. Clifford on marginal product and marginal cost
5. Clifford on marginal, average variable, average total, and average fixed cost curves
6. Clifford on wage and employment decisions for a single input
7. Clifford with an example of optimal input decision for a single input
8. Clifford with old AP question on productivity and employment. The last part looks at cost minimization holding output constant.
9. Kahn on optimal level of employment single factor

Adverse selection and moral hazard at work in Obamacare

http://www.bloombergview.com/articles/2016-01-14/gaming-of-obamacare-poses-a-fatal-threat.

What do you think of the proposed solutions?

A problem with using trackers to solve problems of asymmetric information in the car insurance market

Car Insurers Find Tracking Devices Are a Tough Sell
by: Leslie Scism
Jan 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Adverse selection, Asymmetric Information, Insurance

SUMMARY: Car insurers want to track people's driving habits to better assess their accident risk, but convincing customers to allow monitoring devices in their vehicles has been an uphill battle.

CLASSROOM APPLICATION: Students can evaluate the effect of tracking mechanisms, or usage-based insurance systems, (which measure speed, braking, driving times, roads traveled, and other characteristics of driving behavior) on the automobile industry, most notably insurance rates based on driving habits and the sorting of drivers by these habits. The article also notes the term adverse selection and how it is relevant to the insurance industry.

QUESTIONS: 
1. (Introductory) What is the relationship between credit history and cautious driving behavior? Should insurance rates be tied to credit history?

2. (Advanced) The article notes "adverse selection." Define the term. Why is it relevant to insurance markets?

3. (Advanced) The article notes "barrier to entry." What is the context in the article of the use of this term?

4. (Advanced) What is the relationship between whether an insurance company uses tracking devices in measuring driving behavior and the types of policyholders to company attracts?

5. (Introductory) Should drivers be charged by insurance companies by whether they drive on high-risk roads at high-risk times?

Reviewed By: James Dearden, Lehigh University

Optional material for aligning interests

1. This article in Slate describes Google’s obsession with data analytics. Here is a money quote: “‘We make thousands of people decisions every day—who we should hire, how much we should pay them, who we should promote, who we should let go of,’ says Prasad Setty, who heads POPS’ ‘people analytics’ group. ‘What we try to do is bring the same level of rigor to people decisions that we do to engineering decisions. Our mission is to have all people decisions be informed by data.’”
2. More on testing: http://www.wsj.com/articles/SB10001424053111904836104576563350928693850, and http://www.wsj.com/articles/are-workplace-personality-tests-fair-1412044257.
3. this post and the link from it on the use of employment gaps as a screen for job applicants.
4. This article reports flaws of basing hiring decisions on interviews and offers a couple of alternatives. It is a good introduction to the use of screening in the job market.