Question

a. You are the manager of a logistic company. The profit of your company depends on the number of parcels delivered in an hour. You cannot directly monitor the drivers who help transport parcels, however. You are now considering two possible payment schemes to the drivers. Scheme A: a fixed hourly wage. Scheme B: a fixed payment on parcels transported in an hour. i. Which scheme would you suggest to your CEO? Briefly explain your answer. ii. Can you suggest a possible scheme that is better than Schemes A & B? Briefly explain your suggestion. b. The 2008 Global Financial Crisis hit the Chinese economy staggeringly and adversely. The small and medium-sized enterprises (SMEs) in China were under imminent threat. In response to this crisis and to help SMEs in particular, the People’s bank of China (the Chinese central bank) launched an expansionary monetary policy in large scale. Owing to this policy, the growth rate of credit shot up. However, it was found that most of the credit went to the large companies instead of the SMEs in China. Why Chinese banks prefer making loans to large Chinese companies rather than to Chinese SMEs? Briefly explain your answer based on asymmetric information in the financial market.

Answer 1

The profit of our company directly depends on the number of parcels delivered in an hour. Since the drivers are in the field all the time, it is not possible to directly monitor the performance. Hence, we need to set an outcome based wage i.e. Scheme B (Suggested) - Fixed payment on parcels transported in an hour. Basically, a driver gets paid as per the result they deliver. In a fixed wage hourly model, some drivers may deliver just one parcel and earn the same whereas someone who delivers 5 will also be paid the same. Hence, Scheme A doesn't really reward good performance.

A possible better scheme would be a 40% fixed and 60% variable pay i.e. you pay a fixed hourly salary to everyone and the delivery of the number of packages determine the rest 60% pay. There will be situations where drivers make fewer deliveries because the situation is out of their hand such as traffic is too much, the vehicle broke down etc. In such cases when all payments are tied to the number of deliveries made, the drivers may get demotivated and feel hard done by the policy. Having a fixed pay will give them their basic minimum hourly earning. Further, the variable pay can be enhanced with a daily bonus when a driver makes more than specified "X" number of deliveries.

Note - Solved Q1 as per Q&A guideline. Ques b is unrelated,request to post separately.