# BPP Field Exam 2005

The 2005 field exam was on July 1st 2005. 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 2005 BPP field exam had the following format:

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

The best guess as to question originators is:

• A - Dal Bo
• B.1 - Teece
• B.2 - Teece
• C.1 - Mowery
• C.2 - Mowery
• D - Spiller

Possibly David Levin was teaching?

## Questions

### A: Positive Political Analysis of Corruption

You have found quantitative evidence regarding corruption. More specifically, you have found (i) that in countries where government officials control more valuable resources (i.e. have more discretion over the economy), corruption involves larger sums of money changing hands, and (ii) that, perhaps surprisingly, the same is true in countries where the media is more independent and tends to uncover corrupt deals more often.

TASK A: Write a simple theoretical model to generate testable hypothesis to take to your data. The assumptions of the model are as follows:

i). An official controls a publicly owned resource of value $\Gamma \gt 0 \,$ (say, a national park). An interest group desires to gain control of the common property, and requests that the official grant control of the resource to the group. The group has all bargaining power at the time of making the request.

ii.) If the official grants the favor to the group he faces a cost $ar+m\,$, where $a \in (0,1)\,$ is the probability that the favor is detected and unfavorably covered by the media, and $r\gt 0\,$ is the utility cost of the unfavorable coverage. You may assume $\Gamma \gt ar\,$. The magnitude $m \in \left[ 0,\infty \right)\,$ represents a moral cost the official suffers when doing favors to the group. This last cost is private information of the official, but the group knows this cost is distributed according to the function $F(m)\,$, with associated density $f(m)\,$. This density is decreasing in $m\,$, indicating that smaller costs are more likely than higher costs. All other parameters are common knowledge.

iii.). The timing is: (1) Nature determines the value of $m\,$. (2) The group makes the request to the official and offers in exchange a single, take it or leave it, bribe payment $b\,$, contingent on the favor being granted. (3) The official either accepts or rejects the offer. (4) If the official accepts, the corrupt transaction takes place. If he rejects, the game is over and both players obtain zero. (5) The media either discovers the transaction or not, and payoffs are collected. The game is one-shot and there is no discounting.

iv.) Both players care about money and all other payoff-relevant factors in a linear and additive fashion. Both players are risk neutral. The official's wages are normalized to zero.

Your task is now to write the optimization problem of the interest group and then obtain testable implications for the value of bribes that depend on the value of resources under official control and on the independence of the media.

TASK B: Briefly comment on the suitability of this model to conduct research on (a) the extent of corruption, and on (b) political influence.

### B.1: Patents and Firm Value

How does a firm's patent position affect its ability to capture value from know how? Explain with reference to an industry with which you are familiar.

### B.2: Market for Know How

a.) To what extent is the market for know how efficient?

b.) If there are market failures, what are they?

c.) What private ordering arrangements are most commonly used to overcome transactions problems?

### C.1: Innovation

The Bayh-Dole Act of 1980 clarified the rights of performers of federally funded R&D to obtain patents on research results and to license these results to private firms. Proponents of the Act argued that patenting of federally funded research results would accelerate technological innovation and commercialization.

a.) Discuss the conceptual framework of the innovation process that underpins this premise of the Bayh-Dole Act.

b.) How does the Act's "model" of the innovation process compare with that of Schumpeter's Theory of Economic Development? With the framework outlined by Rosenberg and Kline? With the "model" of the innovation process described by Vannevar Bush in Science: The Endless Frontier?

### C.2: Reforming the Patent System

Teece (1986) and Gans, Hsu & Stern (2003), as well as other scholars, emphasize the importance of formal instruments of intellectual property protection (e.g., patents, copyrights, etc.) in the technology-commercialization strategies of incumbent and entrant firms. Other scholars, such as Merges (1999) and Hall & Ziedonis (2001) argue that "defensive patenting" by incumbent firms has grown during the "pro-patent era" since the 1970s, and Merges in particular claims that the "quality" of issued patents has declined.

The Judiciary Committee in the U.S. House of Representatives currently is considering legislation for reform of the U.S. patent system that includes a "post-grant opposition" procedure that would enable interested parties to contest the validity of issued patents within 9 months of issue in an administrative procedure. The opposition procedure would not affect the right of parties to an opposition to pursue claims concerning validity or infringement of patents in the federal courts.

a.) What is the basis for Merges's claim that the quality of issued patents has declined since the1970s?

b.) What are the likely effects of a post-grant opposition procedure in the U.S. patent system on patent quality and on uncertainty concerning patent quality?

c.) How will an opposition process affect the incentives of firms to pursue "defensive patenting" in industries such as semiconductors, the subject of the empirical study of Hall & Ziedonis?

d.) How will an opposition process affect the commercialization strategies of large incumbents and new entrant firms discussed by Teece or Gans et al.?

e.) How are these effects likely to vary among industries?

### D: Public Contracting: Managing Incentives, Politics and the Theory of Organizations

You have been just hired as the contract design consultant to a large municipality considering undertaking a major construction project. The Project involves a huge Museum in an area known for earthquakes. The Museum is going to house much of the Mayor's family's art (and not so artish) collection, a College of Art, and a Housing Complex for artists, students, and dignitaries.

Here is what you were told by the Mayor's Chief of Staff:

i.) The Mayor is very concerned about costs.

ii.) The Mayor read Demsetz' Why Regulate Utilities, and is convinced that a fixed price auction should be undertaken.

iii.) Furthermore, the Mayor also heard Oliver Williamson talk about Public and Private Bureaus, and is convinced that indeed this construction project does not need to be undertaken by the City's construction department.

iv.) The Mayor is also very concerned about re-election, as in his last re-election he won by 50.1% of the vote. Some troublemakers, probably fueled by Jason's "electoral corruption" paper, have been raising concerns about electoral fraud.

a.) Your task is to design the contract in a way that minimizes costs without jeopardizing the chances that the Mayor will be (legally) re-elected for an unheard fifth term.

In designing the construction contract, please be sure to pay attention to:

1.) Problems that may arise during performance of the contract, and in particular to

2.) construction company's ex-post incentives

3.) city-hall's monitoring capabilities and problems associated with it 4.) potential opportunistic behavior by third parties 5.) Overall expected cost of the project 6.) Nature of politics in this large city

The Mayor requires that you explain in detail the selection of the contract design. Being an intellectual the Mayor likes well-reasoned explanations, but being an executive hates unnecessary blabber and long winded explanations. So be concise, precise and be sure to develop the theoretical basis for your answer. In particular, in designing your contract, please be very explicit about your assumptions about the nature of the project.

b.) Develop the general theoretical insights you have obtained from this exercise.

c.) How could you empirically test these insights?