Institutions Field Exam
August
Instructions
Answer both questions. The two ques-
tions count equally. There are two pages
to the exam (i.e., Question 2 continues
to the next page).
Question 1: A Multi-Task Theory of Bureaucracies
Using Holmstrom and Milgrom’s (1991, 1994) multi-task principal agent frame-
work, develop a model of government organizations that could be applied to
government agencies— such as the State Department. In answering this ques-
tion,
(a) Discuss the key differences between government and private organizations.
(b) Describe in detail the Holmstrom & Milgrom framework as developed
originally.
(c) Describe how, and why, you would modify the Holmstrom & Milgrom
framework so as to capture the essence of government agencies as discussed
in (a). In doing so, describe in detail the set of assumptions—i.e., players,
information set, actions, and equilibrium concept that you need so as to
develop a theory of public bureaucracies.
(d) Without attempting to solve your model formally, describe what you be-
lieve will be the empirical implications of such a model.
Question 2: Joint Venture
Consider the following scenario. Two profit-maximizing firms wish to engage
in a joint venture. The profit from the joint venture (gross of investments) is
π(I1, I2), where Inis the amount of money firm ninvests in the joint venture.
Assume the function π(·,·) is symmetric (i.e., π(I, J ) = π(J, I)), at least twice
differentiable in all arguments, and exhibits the following properties:
•∂π(0, I2)/∂ I1>1 for all I2and ∂π(I1, I2)/∂ I1>0 for all I1and I2
(observe, by symmetry, the same properties hold when I1and I2are in-
terchanged).
•There exists an ¯
I, finite, such that ∂π(I , I)/∂I1+∂ π(I , I)/∂I2<2 for all
I > ¯
I.
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