Does a guaranteed return reduce risk or shift it?

http://qz.com/791481/guaranteed-returns-are-a-terrible-idea/

Compensation in law firms

Law Firms Demote Partners as Pressure Mounts Over Profits
by: Sara Randazzo
Oct 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Compensation

SUMMARY: Faced with client pressure to keep down costs and industry competition to achieve the highest profits, law firms now frequently assess which lawyers are worthy enough for the top rungs of partnership.

CLASSROOM APPLICATION: Based on the article, students can evaluate the compensation structure of law firms. Instructors can pose the question about why law firms are organized as partnerships, in which partners share in the revenues that each brings to the firm.

QUESTIONS: 
1. (Introductory) During a decrease in demand for legal services, why do law firms demote partners?

2. (Advanced) Why are some lawyers valuable to a firm despite the limited revenues that bring to the partnership?

3. (Advanced) Why are law firms organized as partnerships in which partners share in the earnings of the firms?

Reviewed By: James Dearden, Lehigh University

Is traffic congestion a prisoner's dilemma?

One Driver Can Prevent a Traffic Jam
by: Sue Shallenbarger
Oct 12, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Game Theory

SUMMARY: Proponents advise jam-busting techniques, such as preventing bottlenecks, letting others cut in.

CLASSROOM APPLICATION: Students can evaluate whether drivers in heavy traffic are playing a prisoner's dilemma. If so, they can explain driving behavior that makes everyone driving in heavy traffic worse off.

QUESTIONS: 
1. (Advanced) Evaluate the following statement as a cause of traffic congestion: "Selfishness takes hold, and people don't necessarily think much about the common good."

2. (Advanced) What is the prisoner's dilemma? Are drivers in heavy traffic playing a prisoner's dilemma? Each driver does strictly better leaving no gap in front of him or her. However, collectively drivers do better if everyone leaves a gap.

3. (Introductory) Why is a driver leaving a gap in front of his or her car analogous to a person holding a door for others?

Reviewed By: James Dearden, Lehigh University

Contract thery uses the Rational Actor Paradigm to determine optimal contracts when information is costly and asymmetric

Nobel Prize in Economics Awarded to Oliver Hart and Bengt Holmström for Work on Contract Theory
by: Charles Duxbury and Mike Bird
Oct 11, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Contracts

SUMMARY: The 2016 Nobel Prize in Economic Sciences was awarded jointly to Oliver Hart of Harvard and Bengt Holmström of MIT for their contributions to contract theory.

CLASSROOM APPLICATION: The article informs students about this year's Nobel Prize recipients and offers brief statements about the theory of contracts. Instructors can use the article to inspire students to investigate the economics issues involved in contracts.

QUESTIONS: 
1. (Advanced) Why are contracts and a well-functioning legal system to enforce them important to the functioning of an economy? Research question. Distinguish a "complete contract" from an "incomplete contract."

2. (Advanced) What are the incentive issues in the design of contracts for executive compensation?

3. (Introductory) What is an example of a pitfall in the design of a contract for example between a buyer and supplier?

4. (Advanced) What is the incentive problem created by a government bailing out a failed bank?

Reviewed By: James Dearden, Lehigh University

Does McDonald's need a new strategy?

Questions:

1. How should McDonald's respond to entry by "better burger" chains? 
2. Is this response consistent with its current strategy?
3. If the response is consistent with its current strategy, do you think the strategy positions McDonald's to have a sustained competitive advantage?
4. If the response is not consistent with its current strategy, do you think the McDonald's is revising its strategy and, if so, will the new strategy position McDonald's to have a sustained competitive advantage?

McDonald's Knows It's Losing the Burger Battle : Can It Come Back?

by: Julie Jargon
Oct 07, 2016
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: New, "better burger" chains are pulling in customers with gourmet, made-to-order hamburgers, a tactic McDonald's is struggling to mimic. The company is working on improved flavors and customized ordering, a goal in conflict with its need for speed and low cost.

CLASSROOM APPLICATION: Students can evaluate McDonald's burger strategy: frozen vs. fresh patties, made-to-order vs. mass burgers. The strategy about product attributes involves cost, consumer preferences, preparation time, and competitors' product attributes.

QUESTIONS: 
1. (Advanced) How does the entry of made-to-order hamburger chains affect McDonald's strategy?

2. (Advanced) What is the tradeoff McDonald's faces when deciding whether to serve fresh or frozen burgers? How do the costs of the two types of burgers, consumer preferences, and competitors' products affect the tradeoff?

3. (Introductory) Should McDonald's improve the quality of its current burgers or should it attempt to compete head to head with made-to-order burger chains?

Reviewed By: James Dearden, Lehigh University

Hold-up = price discrimination in the market for apartments

Some Big U.S. Cities See Apartment Rents Fall for First Time in Years
by: Laura Kusisto
Oct 05, 2016
Click here to view the full article on WSJ.com

TOPICS: Supply and Demand

SUMMARY: Apartment rents declined in some of the country's priciest cities during the third quarter, a dramatic reversal that could signal the end of a six-year boom for the U.S. rental market.

CLASSROOM APPLICATION: Students can evaluate the effect of an increase in the supply of apartments and a decrease in job growth, which causes a decrease in demand, on apartment rents. The article also notes a "hold-up problem": Landlords typically drive a harder bargain on renewals because they know residents would rather avoid the hassle of moving.

QUESTIONS: 
1. (Introductory) What is the effect of an increase in the supply of apartments on rents?

2. (Advanced) What is the effect of a slowdown in job growth on rents?

3. (Advanced) Why do landlords typically drive a harder bargain on apartment lease renewals?

Reviewed By: James Dearden, Lehigh University

Who benefits when Delta Lloyd’s executive board rejects a takeover bid

http://www.wsj.com/articles/delta-lloyd-rejects-nn-groups-takeover-bid-1475820920

Questions:

1. Did Delta Lloyd reject the bid or did the executive board of Delta Lloyd reject the bid?
2. Prior to the bid, did the buyers and sellers in the stock market believe that Delta Lloyd's "capital position [and] opportunity to improve further capital generation and dividends” warranted a 30% increase in the market value of Delta Lloyd?
3. Whose opinion of the value of a company is more accurate, the buyers and sellers in the stock market or the executive board? 
4. Did the offer help or hurt shareholders relative to their position before the bid?
5. Could the shareholders benefit from the executive board's decision to reject the bid? If so, how?
6. Could the members of the executive board benefit from the decision to reject? If so, how?