# BPP Field Exam 2008

The 2008 field exam was on June 27th 2008. Reference material was permitted, communication was not. It was stated that grading would be based on the assigned times for each question.

## Format and Originators

The 2008 BPP field exam had the following format:

• Morning (3 hrs): Question A.1 or A.2 (1hr), Question B.1 or B.2 (2hrs)
• Afternoon (3 hrs): Question C (1hr), Question D (2hrs)

The best guess as to question originators is:

• A.1 - Mowery
• A.2 - Teece
• B.1 - Morgan
• C - de Figueiredo
• D - Spiller

## Questions

### Question A.1: The Bayh-Dole Act of 1980

The U.S. Bayh-Dole Act of 1980 has led most U.S. universities (including the University of California) to require that faculty disclose potentially patentable intellectual property to their employing institution. Universities then elect whether or not to patent and license the IP to firms. Numerous European governments and the Japanese government have passed broadly similar legislation that involves a requirement for faculty to disclose intellectual property to their universities, arguing that such a requirement is necessary to encourage technology transfer. By contrast, both Sweden and Germany have preserved what is known in both nations as the "professor’s privilege," which grants ownership of the results of their research to faculty.

a.) How does the professor’s privilege affect university-industry technology transfer in the nations maintaining it?

b.) What are the likely effects of the professor’s privilege on the level and characteristics (e.g., patent importance) of patents on academic research results?

c.) How would you test the predictions associated with your answer to (b)?

### Question A.2: Platforms

a.) Explore the role of complementarities in the innovation process. To what extent has the modern literature on "platform" and n-sided markets sharpened our understanding of complementarities.

b.) What can economics teach about the creation of markets and new ecosystems? How can firms build "platforms" to help stimulate the development of new markets.

### Question B.1: Competition with unknown quality

Two firms are selling a product in an online market. This product costs zero for each firm to produce. There is a unit mass of consumers in this market. A fraction $\lambda\,$ of these consumers view the goods as perfect substitutes and simply buy from the firm offering the lowest price provided it doesn't exceed their maximal willingness to pay. The remaining fraction $1 - \lambda\,$ of consumers infer quality from price. They expect that the firm offering the lowest price must be providing an inferior version of the good. Hence, these consumers purchase from whichever firm offers the highest price provided it doesn't exceed their maximal willingness to pay. All consumers have unit demand and a maximal willingness to pay of 1.

Firms compete in this market by simultaneously making price offers. Every consumer sees both price offers and then makes a purchase decision. In the event both firms offer the same price, consumers are split evenly in the market. Everyone is risk-neutral in the model and consumers buy even if the price is exactly equal to their willingness to pay.

a) Write down firm 1's optimization problem.

b) Suppose that $\lambda\,$ < ½. Find a symmetric pricing equilibrium.

c) Suppose that $1 \gt \lambda \gt \frac{1}{2}\,$. Find a symmetric pricing equilibrium.

d) Now suppose that Consumer Reports tests the products of both firms and reveals to all consumers that the two firms' products are identical in every respect. Find a symmetric pricing equilibrium. Relative to the case where $\lambda \lt \frac {1}{2}\,$ what is the value to consumers (in terms of realized consumer surplus) of the information provided by Consumer Reports?

### Question B.2: Opportunistic sellers

Consider an economy with many identical Buyers that can each engage in a transaction with one of many sellers. For concreteness, imagine that there are more buyers than sellers and that the market for transactions must clear. The transaction can either succeed or fail. Each buyer’s value of "success" is 1 and of "failure" is 0.

There are two kinds of Sellers. A proportion $1 - \beta\,$ are "good" and they succeed with probability $p \gt 0\,$. A proportion $\beta\,$ are "opportunistic" and can choose some effort, $e \in [0,1]\,$ at a personal cost of $c(e)\,$ where $c'(0) = 0, c'(1) = \infty\,$ and $c''(e) \gt 0 \;\forall e = 0\,$. The opportunistic types succeed with probability $ep\,$.

The economy operates for 2 periods. Sellers live for two periods but a new cohort of buyers is active in each period, and second period buyers can observe the first period outcome of transactions.

Effort and types are not observable to buyers so that in each period buyers who wish to transact with sellers will pay a price for the transaction in advance, after which the service/good is delivered and failure/success is observed.

a.) What level of e would maximize total surplus?

b.) An equilibrium is defined by a price $w_1\,$ that buyers pay sellers in the first period, and history contingent prices $w_2(S)\,$ and $w_2(F)\,$ (for Success and Failure respectively) that buyers pay sellers in the second period, so that expectations about outcomes are correct, and sellers best respond to current and future outcomes. Is there an equilibrium where opportunistic sellers exert the level of $e\,$ you found in (a) in each period? If so, show it. If not, explain why not.

c.) Is there an equilibrium in which opportunistic sellers choose no effort in both periods? If so, show it. If not, explain why not.

d.) Find the equilibrium of this market, and argue that it is unique.

e.) If the sellers exert effort in the equilibrium you found in (d) in some period, what market mechanism provides them with incentives? How would you interpret his?

### Question C.1: Corporate Governance

A major debate in corporate governance is about the benefit of "insider" versus "outsider" board members. At the core of these debates is the potential for rent seeking on the one hand (by management) versus the benefits of expertise and coordination on the other.

Outline a model which would provide interesting implications for this debate. In particular,

a.) specify the setup of the model - including the decision-making institutions, and

b.) discuss what you think may be the main interesting propositions and the logic for how they would be derived. You may draw on existing models in answering the question (eg multilateral bargaining, signaling, etc.).

### Question D.1: Privatizing water services

Due to global warming concerns, the increasing frequency of draughts, and the need to raise water fees, the Board of the East Bay Municipal Utilities District (EBMUD – the public water company) decided to study the benefits of private provision of water services.

The Board has been advised by a well know professor that water services are a "fragile" sector, in that it is easy for the industry, once privatized, to fall back again in public hands.

Given that professor’s "pessimistic" view, the Board has decided to hire you, as a scholar well trained in new institutional analysis, to provide your views on alternative ways of organizing private provision of water services in ways that avoid the probability of the industry falling back into government hands.

In particular the Board would like you to:

a.) Develop for the board this professor’s theory of fragility of the water service sector

b.) Develop some testable empirical implications

c.) Apply this theory to the US and to Northern California, in particular,

d.) Explain how you would suggest to implement the privatization of EBMUD water services in ways to avoid a high probability of the sector falling back into public hands