Question

Suppose that you work for a large corporation and that your job entails many hours of working with a computer. If you treat the computer with care, it will not break down. But if you abuse the computer (a convenience for you), then the computer will frequently need costly service. Describe conditions under which it is best that you, rather than your employer, own the computer. Discuss verifiability and incentives in your answer.

Short answer

Own the computer to ensure direct accountability and incentivize careful use.

Step-by-step solution

Analyzing Ownership and Responsibility

When you own the computer, you bear the full responsibility for its maintenance and any potential costs arising from misuse. This creates a strong incentive for you to treat the computer with care to minimize expenses, as any repair costs come directly from your pocket.

Considering Employer Ownership

If the employer owns the computer, you might not have the same level of care regarding its treatment since any repair costs are covered by the company. This may reduce your personal incentive to handle the computer delicately, potentially leading to more frequent breakdowns.

Evaluating Verifiability of Use

Verifiability refers to how easy it is to monitor your treatment of the computer. If it is difficult for the employer to verify and monitor your computer usage and treatment, owning the computer personally increases your incentives to maintain it well, as negligence directly affects you.

Incentives for Careful Use

When you own the computer and the responsibility for any associated costs, your personal incentive to avoid abusing the computer is stronger. This avoids the moral hazard of carelessness due to separation of ownership from use costs.

Conclusion on Ownership

If you can bear the initial acquisition cost and prefer more control and direct accountability for care, it is beneficial for you to own the computer to ensure careful usage and avoid unnecessary costs.

Key concepts

Ownership Responsibility

Ownership responsibility plays a crucial role in the way resources are handled and maintained, especially within a workplace setting. When you own something, such as a computer for your work, you are personally responsible for its upkeep and maintenance. This responsibility translates into financial implications because you will have to pay for any repairs or replacements.

For example, if you own your work computer, you have a direct incentive to treat it well, because any mishandling that leads to damage is your financial responsibility. You will want to avoid any unnecessary costs by being careful and ensuring the computer remains in good condition.

In contrast, if your employer owns the computer, your level of caution might diminish because they handle any repair expenses. Hence, by accepting ownership, you also accept the full scope of responsibility, which can ultimately foster more attentive care and maintenance.

Moral Hazard

The concept of moral hazard arises when one party engages in risky behavior because they do not bear the full consequences of their actions. In a workplace, this often occurs when there's a disconnect between usage and ownership responsibility.

If an employer owns the computer, an employee might take less care because they won't have to pay for damages, leading to a moral hazard. There's a disparity between who uses the resource and who covers the cost if something goes wrong.

Owning the computer yourself reduces this moral hazard because you will directly face the consequences of your actions. It aligns your incentives with the goal of maintaining the computer in a good state. This naturally encourages more cautious behavior, limiting unnecessary risks or neglect.

Verifiability

Verifiability is the ability to confirm how a resource, like a computer, is utilized and treated. It is essential for ensuring proper usage and accountability.

In some scenarios, it can be difficult for an employer to thoroughly monitor how their equipment is being treated by employees. If the usage is not verifiable, it may lead to inefficiencies and reduced care for the resource. The employee might not feel accountable for their actions if they believe nobody is observing their conduct.

By owning the computer personally, you eliminate the dependency on external verification. Your care and attention to the computer become self-monitored because poor handling directly impacts you. This increased autonomy over personal property naturally enhances the incentive to keep it well-maintained.

Principal-Agent Problem

The principal-agent problem occurs when one person (the agent) makes decisions on behalf of another (the principal) that may not align with the principal's best interests. This issue is prevalent in employment settings where different incentives and responsibilities exist between employers and employees.

For instance, an employee might prioritize convenience over the longevity of a company-owned resource, such as a computer, because the financial impact of damage falls on the employer. This misalignment can lead to inefficiencies and increased costs for the principal.

By owning the computer, the individual aligning their interests with their own well-being resolves the principal-agent problem. You are no longer making decisions for someone else's resource, which could significantly reduce conflicts of interest. This alignment ensures decisions regarding care and usage are more consistent with maintaining the computer in optimal condition.