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Tuesday, October 28, 2008

Thinking starts a chain reaction

Wow, that was almost exactly the exam I had prepared for. The only really unexpected thing was Section A, and I'd expected that to be unexpected, if you get me. My signalling question in Section B was beautiful (but it was about sausages! It made me hungry!). Section C contained two questions that were simply joint-value-maximising, partial-derivative-zeroing, gains-from-trade-splitting contract implementation; I did one of those, then went straight for the question on repeated games, because I was so excited on reading it through to realise that I could actually do it. I even got my favourite seat at the left of the lecture room. It was all perfect.

After all that stress about moral hazard, I never even looked at that question. It looks very long.

Section A strangeness:

... you are to take any non-italicized text as true. State if the statement in italics is true or false, and explain why.

Question 4: In models of moral hazard, the equilibrium contract will not be unique. The reason is that incentives for the optimal effort can be provided either by a linear contract or by a threshold contract.

Now, surely you'll agree that only the second sentence should be italicised? If someone believed the first sentence was false, they'd have a really hard time answering this question.

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