Question

Explain how each of the following affects the optimal method of acquiring an input. In each case, be specific about the method of acquisition and provide explanations.

a) A complex contracting environment

b) A specialized investment

c) Opportunism

d) Bargaining costs

e) The costs of bureaucracy

f) Gains from specialization

Answer 1

a) A complex contracting environment

It reduces oportunism, specialization, avoids skimping on specialized investment. And costly in complex enviornment

b) A specialized investment

An expenditure that must be made to allow two parties to exchange but has little or no value in any alternative use. For example, suppose that to ascertain the quality of bolts, it is necessory to spend $ 100 on a machine that tests the bolts strength. If the machine is useful only to testing a particular manufacturer's bolts and the investment in the machine is a sunk (and therefore non-recoverable) cost, it is specialized investment.

c) Opportunism

Economic opportunism is a term related to the subversion of morality to profit. Opportunism, a foundational assumption of many economic theories that claims human beings are generally self-intersted and will take advantage of others when possible. For example some, some economic actors will take advantage of another party to advance their own interset by making false promises, misrepresting intentions, reneging on agreements or changing the terms of a deal to benefit themselves. Other economic actors will be less deliberate by attempting to benefit from free riding. Such behavior, deliberate or otherwise leaves, the "honest"party to the exchange worse off.

d) Bargaining cost

These are the costs related to coming to an agreement that is agreeable to the parties involved in drawing up a contract. Bargaining costs either can be cheap, such as buying a newspaper, or can be very expensive such as trading a basketball player from one team to another.

e) The cost of bureaucracy

A bureaucracy is typically refers to an organization that is complex with multi layered system and processes. These systems and procedures are designed to maintain uniformity and control within an organization. A bureaucracy describes the established methods in large organizations or government.

f) Gain from specialization

The benefit of specialization include a larger quantity of goods and services that can be produced, improved productivity, production beyond a nation's production possibility curve, and finally resources that can be used more efficiently and cost of production will lower.

So the optimal for acquiring inputs depends on the nature of the transaction costs and specialized nature of the inputs being procured.