Post 11 Reflection

In this class, I learned the partial equilibrium and the general equilibrium which I never heard from any other economics classes before. The partial equilibrium efficiency concept is social surplus. An efficient allocation maximizes the social surplus. In occurs where marginal benefit equals marginal costs. This concept only occurred once in my undergraduate study time. At that time, I only know the most efficient allocation of resources occurs in which marginal benefit equals marginal cost. I did not really understand concept and graph behinds the definition. The general equilibrium efficiency concept is Pareto Optimality. An allocation is Pareto Optimal if you can’t make somebody better off without somebody else worse. Originally, I did not notice how important this concept was in making real world decision until another accounting graduate level course also discussed this topic. We need to learn how to calculate the Pareto Optimal combination by using the formulae, which is much more difficult than just simply understand the concept in this class. At least, I really appreciate this course discussed Pareto optimal concept first so that I have a better understanding in the other class even though I am still struggling with calculations.

In addition, triangle principal-agent model is also a very interesting topic which open up my point of view of the agency problem. Originally, I am only aware of a simple principal-agent model problem which causes moral hazard and adverse selection problems. Actually, in the real world, there are many cases agent would work for two principals who have contradicted interests. Moreover, single loop learning and double loop learning help me better understand how two different types of organization conflicts occur. I believe that traditional companies or industries would be more likely model 1 type while modern companies especially high-tech companies would be more toward to model 2 type organizations since model 2 boss would encourage employees to communicate their opinions.

I think this pedagogic approach could work better if Professor Arvan could provide more topics, bullet points and examples on power points to present in class, since most time the whole class session acts like a casual live talk, we might overlook some important ideas. For blog posts, I would always start with a reading instruction which is very clear and helpful to initiate the brainstorming process. If the key terms are new to me, I would google those important terms first, or just look at other students’ blog posts to help me understand the topic. And then I would start to think about the examples and write down the thesis statements for body paragraphs. In the end, I would use grammar check websites to proofread the whole work. Generally, it takes me about one and a half hour to complete weekly post. For excel homework, I have to say sometimes it is simple that only took me less than an hour to complete. Sometimes it is extremely challenging, and it probably takes me couple days to think about it. I have to google the terms first, read books, and even ask friends. If I really could not figure out by above methods, I would ask Professor Arvan as my final solution. Even though I complete the excel homework, some of those work I still do not understand thoroughly.

Finally, I would like to see more group discussion in class, not a just student to Professor format. I think this would help get close to the other classmates and learn ideas and thoughts from each other. Probably, group debate would be an interesting idea to promote discussion.

Post 10 Reputation

Last summer, I interned in a Chinese bank as a lobby manager. In general, I was responsible for distributing customers into different service lines. Sometimes, I also needed to provide the financial service for clients. Since I looked very young and inexperienced, it was hard for me to earn clients’ trust at the very beginning. It is quite often for clients to question me how old are you? How long have you been working here? Once they realized that I was just an intern student, the conversation was over immediately. Situations became worse and worse, I had to think about how to build up my reputation with clients. Hence, I started to observe customer reaction when I communicated with them.

During one-week observation, I found out many interesting things that helped me to understand customers’ needs and tail the right investment plan for them. To illustrate, the elderly customers would like you to ask their family situation first such as children education and health issue since those were their biggest concerns. If I started the conversation by asking “how is going with your family? Is everyone doing ok?”, they would suddenly felt very close to me and started to talk about the issues brought them to me. For middle age clients, they prefer to know your expertise and academic background before they consult financial service from you. My best strategy to establish a reputation with this group client was telling clients that I studied in the top university of America and major in accounting. Naturally, they started to trust my capability of conducting professional financial service.

Through this work experience, I learned that it was important to show your clients that you do care their personal interests and needs before performing any service. Additionally, I also built up self-confidence and communicative skills while dealing with a number of clients every day, which would help me demonstrate a long-term relationship with clients in the future. Moreover, in order to continually improve my reputation, I started to learn all the financial products provided by our bank by asking managers. And then, I also collected the information of similar financial products provided by other banks. I could easily tell the advantages and disadvantages of each products providing by our bank and explained clearly to my clients of other banks’ financial product performance. Later on, no on questioned my ability to conduct financial service since I have full knowledge of information clients want to know.

Personally, I really could not come up with some examples about giving up a reputation for some immediate gains. However, this reminded my junior high school teacher’s example. My teacher began to establish a fair and incorrupt reputation at the first class when he gave an introduction. He told us that told your parents do not give me gifts or money in order to ask me special care of you guys, such as giving more opportunities to join the competitions or more generous grading. (I have to say this type of behavior is quite common in China). Normally, students could only join some major competitions by teacher’s recommendation. If the teacher consistently treats students very bad, such as intentionally punish students hardly when he is late a little bit or bad handwriting homework. This is the signal for both students and their parents to send gifts to bribe the teacher in exchange for nicer attitude or treatment. After his long speech, we really thought he was an integrity teacher, and treat students in a fair manner. However, it turned out this was a joke. We should understand his speech in a reciprocal way. There was a time the whole school needed to denote money to people suffered earthquake disaster. (Implicitly, the principal teacher could get a bonus if his class donate most money than the other class did.) Thus, every principal teacher was actively encouraging the whole class to donate as much as possible. He prepared a donation box in front of the class, every student lined up and put money into the box one by one. He stood right next to the donation box. He would monitor how much money each student donates, and remembered the students who did not donate considerable money. Later on, he would always take a chance to punish those students, for example, he criticized one guy in the whole class just because he asked neighbors one question in class. (Note: We are not allowed to talk with other students during the class.) And he called guy’s parents came to school and kept saying this student is very naughty, does not respect him etc. Not just this student, all other students who did not donate considerable money all got punishment. One day, when our principal teacher came into the class, he did not criticize this guy anymore instead he appraised this student’s performance and asked the rest of class need to learn from him. Everyone was confusing why our teacher changed his attitude dramatically. Later on, this guy told us his parents bought a lot of gifts and send to the teacher. Personally, I really despised this kind of behavior. As a teacher, his primary job is to educate students not bully students. Hence, I think this is an example that sacrifice reputation for the short-term gain.

Post 9 Triangle principal-agent model

This is a very interesting model which required to be covered in accounting classes, but only not triangle model. In our real life, we definitely experienced principal-agent model when we make some transactions, like stock, house, cars etc. I never thought agents may work for two principals before, which should be quite obviously if I ever take further considerations. Due to the information asymmetry, the agent may not act at the best interests of principal all the time.

Here is a true example about the triangle principal-agent model I ever experienced. 

We were going to sell an apartment which located in the commercial center. Because of the size and location, the price of this apartment is very high. There are three apartments on each floor with similar size and minor differences in structure. The structures of the left one and right one are completely reverse like a mirror image, and both apartments are around 150-meter square. In addition, the structure of the middle one would be more symmetrical in arranging the rooms, which is about 145-meter square. Since my family was planning to move into that city, we hire a property company to sell our apartment that located on the left side of the building. At the time of signing the contract, this building is still on construction. Tenants would only move in after two years when the building is completed. In this contract, we clearly stated that we will not pay for the commission and minimum price $5000 per meter square that we accept and expected price $6500 per meter square we want to sell.  We only make a down payment of contract fees. The agent would collect the commission from the buyer when they made the deal, and bonus if the agent sold the house beyond our expected price, which equals to the bid price minus expected price.

To analyze the situation, the agent wants to maximize selling price to earn more bonus. However, if the price is too high, the potential buyers could not afford it. Thus, the agent wants to make sure the price is reasonable and attractive to make sure they could sell the apartment first, and then try to maximize their own bonus part. Due to the high price, large space and severe economic downtown in China, it is really hard to find a matched buyer who is willing to buy our apartment. After two years, finally the property agent found a buyer who is capable of buying this apartment, and call our family to sign up the contract. We negotiated with a potential buyer about the price again, and then finalize the settlement date and payment methods. After sign up the contract, she needed to pay our family non-refundable deposit about 30% of total value of the apartment. When we finally decided to sign up the contract, the buyer asked us, “Just to double check one more time, you guys are going to sell apartment 301 right, in the middle of the building.” We were so surprised, “Yes, our apartment number is 301 but located in the left side of the building.” Suddenly, she realized that something must be wrong here. “Did you guys know the constructor switch the original apartment number with left side one and middle one?” Obviously, we totally had no idea since we did not follow up the news of our apartment, and rely on the property agent completely. She said, “I got it, your house is not the one I planned to buy. The deal is off.” We were so pissed off how could this kind of mistake happen. “Don’t you see the floor plan before you decide to buy the house?” She replied, “Yes, this is the question I want to ask the agent. How could it be possible you still give me a right floor plan but wrong property when signed up the contract? As a property agent, you definitely know all the updated information related to the building.” 

At this point, I hope you get the point of this example. This property agent acted both in property owner and potential buyer’ behalf to exchange information, negotiate price and set up contracts. In order to earn commission and bonus, they intentionally deceive both my family and potential buyer due to the information asymmetry. If the agent successfully deceived both of us, once buyer signed up the contract, the agent could earn commission already since the deal is done. Later on, even the buyer found out this is not the house she planned to buy, a deposit is non-refundable. She must suffer the lost on her own, and forfeit buying our apartment. Then the agent would resell our apartment again to the next potential buyer. During this deal, our family does not have any loss except wasting our time and transportation fee. At least, if could earn a non-refundable deposit as a compensation if the deal is done. The only uncomfortable part is that we still have to hire this immoral agent because our property is not selling to the buyer successfully.

To conclude, I think the triangle relationship agent would be more likely to take advantage of two principals due to the information asymmetry. Both principals are a lack of knowledge of each other and could not talk directly without the present of agents. This gave the agent enough room to play the tricky game to maximize his or her own interests. In this case, the agent is more likely satisfy our needs but sacrifice the interests of the other principals since the potential buyer is the main source of the agent’s commission and bonus. We have already paid a fixed contract fee so they could not get more benefit from us.