Managerial Economics: Analysis and Management, with eBook Access Code, 10th Edition

15Asymmetric Information and Organizational Design

I was to learn later in life that we tend to meet any new situation by reorganizing, and what a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization.

PETRONIUS ARBITER, 210 B.C.

LEARNING OBJECTIVES

1. LO#1. Define asymmetric information, and describe how it can lead to adverse selection and moral hazard.
2. LO#2. Show how asymmetric information influences decision making in organizations.

Bloomberg Quicktake Video: Chapter 15: 2020 Year of Crisis: The Moral Hazard Threat

Microsoft's Pivot on Paying Legal Fees

In recent years, Microsoft has taken steps to change the way it pays outside law firms for the legal work they do. Major corporations have relied on in‐house legal departments to handle the majority of their legal work but have also used outside law firms to do specialized work related to litigation, antitrust issues, patent law, financial legalities, mergers and acquisitions, and security law. Traditionally, firms paid outside counsel according to the number of hours they billed (at various prices per billable hour depending on the nature of the work).

Microsoft's announced goal is to switch from billable‐hour compensation to fixed payment schemes for as much as 90 percent of its outside legal work. The company and law firm would agree ...