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Connor Thomas Ms. Biesiada ENGL 106 22 November 2013 Cover Memo At the beginning of this assignment, to be honest I wasnt looking forward to it. In retrospect, this was my favorite assignment for the class. I truly enjoyed analyzing the chapter at hand and thoroughly enjoyed the process of being confused by the article, to then understanding what it is saying through critical analysis. I selected the article I selected for multiple reasons. First of all, I wanted an article in the Finance/Economics field. After finding an article in the field I desired, I wanted an article that described something I had no prior knowledge on. This was for two reasons, I wanted to gain something out of this assignment besides a grade, I wanted to gain more knowledge. I also wanted my analysis to have no prior bias so as a result I could analyze the article with just the information I was given in the text. I hoped to receive an abundant amount of information on the topic, and I believe I learned a good amount that will allow me to go into future economics courses with some bit of knowledge. The article I selected aligns with my future degree Im pursuing currently through the School of Management here at Purdue. I currently am planning on a B.S. in Management along with Economics or Finance. I havent decided yet whether to do Finance or Management, which was also why I sought this article to see if I would be interested in economic issues. I also have had an immense interest in how companies decide on their decisions and this article helped explain to me ways they go about making decisions. I was so surprised with this article when I began flipping through all the pages and seeing the countless amount of examples through the usage of graphs and formulas that only experienced members in the field would understand. This shows the depth of research

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the authors went to in order to prove their point, therefore the validity in their words increased exponentially. I believe this paper had the potential to be a fifteen paper if it wanted to be. The amount of examples I could have used were ultimately much more than I used. For the purpose of convenience and easiness to read, I took that into consideration and only showed one example of the important proofs in the chapter to make it an easier read. The most difficult process throughout this assignment, believe it or not, was the analyzing of the text. At first I had no idea what was being said, but throughout careful analysis paragraph by paragraph, I was able to piece it all together and understand the main message of this chapter in the American Economic Review. I hope you enjoy reading this analysis.

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1. Hausch, Donald B, Yeon-Koo Che. Cooperative Investments and the Value of Contracting. The American Economic Review 89:1 (Mar, 1999): 125-147. Print. This article written by Donald B. Hausch and Yeon-Koo Che for the American Economic Review will be more than important for my research. This chapter of the American Economic Review describes the benefits to two parties when involved in a cooperative investment rather than selfish investments. This article gives an abundance of examples as to why this is true and as to why selfish investments and incomplete contracts dont provide for optimal return on investments. The chapter is also relevant to my own personal studies as I plan on either majoring in Economics or Finance at Purdue. This will be the main article I reference throughout this paper. 2. Move 1: The holdup problem has led many authors to propose various organizational

interventions as remedies, including vertical integration (Benjamin Klein et al., 1978; Williamson, 1979), exchanging hostages (Williamson, 1983), shifting property rights (Sanford Grossman and Hart, 1986; Hart and Moore 1990), allocating control rights (Philipee Aghion and Patrick Bolton, 1992), and designing an authority relationship (Aghion and Tirole, 1997). When stating this sentence towards the beginning of the chapter, this opened up the opportunity for the authors to refute previous theories and claims with respect to cooperative contracts. By stating previous theories, this gives validity to the chapter because the chapter is talking about new information that hasnt been studied to the depth that it is in the chapter of the American Economic Review. It also gives the chapter a purpose, if someone has already made a parallel claim on the subject, there would be no purpose for the analyzing done in this chapter. Recently, however, the incomplete contracting paradigm has been challenged by several authors who argue that simple (incomplete) contracts can solve the holdup problem (125).

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Move 2: First, regardless of the degree to which the investments are cooperative, efficiency can be realized if the parties credibly commit not to renegotiate their contract. Our second and more important result treats the case in which a commitment not to renegotiate is impossible for the parties. ..If investments are sufficiently cooperative, then there exists an intermediate range of bargaining shares for which contracting has no value. ..Lastly, even if the cooperative nature of the investments is sufficiently weak that contracting has value, an efficient outcome may not be possible (127). This statements job to the reader, if read sufficiently and with depth, will allow the reader to determine what the authors final conclusions and opinions are about the subject. It also works to move the essay along because now, this statement can work as a thesis and the remainder of the essay will be able to be organized in order to support this statement. Move 3: Our interest is in cooperative investments that generate a direct benefit for the trading partner. A cooperative investment is pure if it offers no (negative) accompanying direct benefits to the investor, and it is hybrid if it offers direct benefits to both parties, i.e., has both cooperative and selfish elements (Hausch and Koo-Che 126). Yeon-Koo Che and Donald Hausch use this portion of the essay in order to define what they plan on analyzing for the remainder of the chapter. When saying the words, Our interest at the beginning of the move it allows the reader to understand what the authors plan on concentrating the chapter on along with defining their main message for the reader. This chapter in the American Economic Review follows the CARS model precisely. Although neither author comes out and states each move clearly, when examined closely, the moves are quite evident. Furthermore, this article doesnt follow the CARS model in order. For

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example, Move 2 doesnt appear until near the end of the introduction as opposed to Move 3 that was the first move cited in this article. 3. In order to assess the way the authors attained their information, the works cited list will

be crucial to determining their methods. When examining the works cited list, the first thing I realize is amount of their references. In all, 42 sources are referenced within this chapter. When analyzing the works cited, it is apparent that this chapter is just one portion of an ongoing study that many across this world are also working to prove. Titles such as Specific Investment Under Negotiated Transfer Pricing: An Efficiency Result, Incomplete Contracts and Signaling, and An Incomplete Contracts Approach to Financial Contracting all work to continue an ongoing academic conversation. Throughout the essay, the authors use citations for multiple reasons. At first they use the following citation when to they stated a claim thats already been addressed by multiple people, The resulting incompleteness of contracts, together with opportunistic expropriation by the trading partner, means that parties will invest at less than the socially optimal levels (Paul Grout, 1984; Oliver Williamson, 1985; Jean Tirole, 1986; Oliver Hart and John Moore, 1988). Another example of this is on page 128: The limited nature of contracting has been noted by others. Stewart Macaulay (1963) observed that business transactions often do not resort to specific contracts. Kathryn Spier (1992), Mathias Dewattripont and Eric Maskin (1995), and Bernheim and Whinston (1998) show that, while contracting is valuable, the parties may rationally choose to leave the contract incomplete. The authors also use the citations when using the footnotes and explaining a topic in more depth. For example, the authors use a footnote on page 126 that goes onto to explain that,

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W. Bentley MacLeod and James Malcomson (1993) and Che and Chung (1999) are the first theoretical treatments of cooperative investments. The latter paper derives a special case of the irrelevance of contracting result that we develop here (126). Stating claims from previous authors allows the authors to expand on previously stated ideas and theories in order to continue the academic conversation. The author used only credible sources to validate his claims, thus resulting in a valid argument. 4. Throughout reading this article, the authors style was very apparent. Time and time

again the author would state a claim or position, then confirm it with a multitude of examples. For example: Cooperative investments are critically important in modern manufacturing, where the adoption of quick-response inventory systems and flexible manufacturing approaches has increased the need for coordination across different production stagesToshihiro Nishiguchi (1994 p. 138) reports that suppliers send engineers to work with [automakers] in design and production. They play innovation roles in gathering information about [the automakers] long-term product strategies (127). This is just one of many examples where the authors will make a claim, then support that claim with a multitude of real practical examples. The tone of this essay was one can infer as educational and advanced. Although necessary, I often found the authors using a lexis only educated members of their field would understand. For example, Other common examples of cooperative investments include qualityenhancing R & D efforts by suppliers and workers simply paying attention to their jobs (127). When a relatively uneducated person reads a sentence like that, they ask themselves, Whats R & D? Only members within the Economics/Finance discourse community would have an idea

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what this statement means. Knowing the authors were comfortable enough to abbreviate a term in a formal report means majority of educated members of their field understand it, but not the outsiders like myself. It is also obvious the chapter and books intended audience is not one like myself, but people within the Economics/Finance field due to the vocabulary used and simply the title of the chapter and book. Furthermore, these authors like to boast their own vocabulary with usage of such words as, idiosyncratic. The organization of this paper is set up in a format conducive for the educated reader. After a 4-5 page introduction and stating the overall point of the article as the very beginning in italics, makes up the beginning of the report. Followed by the introduction is a set of sections that elaborate on how they came to their multiple conclusions. The elaboration includes many complex formulas, graphs, and assumptions that only educated people in economics would understand. The style, organization, format, and tone tell the reader many things about this article. Throughout examining the personalities of this article, it is clear to the reader what theyre getting into when attempting to read a complex article like this one. These personalities show who the article is intended for along with its intent. 5. Thesis: Our interest is in cooperative investments that generate a direct benefit for the trading partner. A cooperative investment is pure if it offers no (negative) accompanying direct cooperative and selfish elements (126). Throughout the chapter, this claim is constantly referred back to as it is the main claim authors Yeon-Koo Che and Donald B. Hausch seek to prove throughout the chapter in the American Economic Review. The important portion of the thesis is that a cooperative investment

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is only pure if it benefits both parties equally. For example, following the thesis the authors introduce multiple cases such as this one: Cooperative investments have received little attention, despite being common in practice and present in several classic settings. For example, the famous General Motors-Fisher Body example deals with Fisher Bodys decision of whether to build a plant adjacent to General Motors. Such an arrangement, by lowering shipping costs and improving supply reliability, offered benefits to both parties (126). The authors then proceed to claim that it doesnt have to just be the purchasers who make cooperative investment. They proceed to claim that, It can also be the buyer who makes a cooperative investment (127). Consistently throughout this chapter, whenever the authors make a claim, they support it with many real-life examples. For example, after this claim the authors evidenced the claim with this example: After Honda chose Donnelly Corporation as its sole supplier of mirrors for its U.S.manufactured cars, Honda sent engineers swarming over the two Donnelly plants, scrutinizing the operations for kinks in the flow. Honda hopes Donnelly will reduce costs about 2% a year, with the two companies splitting the savings (Magnet, 1994). The authors use these many examples to further prove their thesis. Although examples of real life situations are nice, it doesnt go the extent it needs to in order to prove the overall thesis of this chapter. In order to go that extent, the authors address this issue by incorporating pages of graphs and analysis of the graphs with complex formulas the average Joe would never understand. For example, examine Figure 1 on page 131:

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Figure 1:

The authors then proceed to explain the chart in complex terms, but also include formulas such as Figure 2 below: Figure 2:

This approach by the authors was extremely successful with examplifing the practicality in how useful cooperative investments are to two parties negotiating a deal. Through the use of 40+ legitmate sources from such sources as the Rand Journal of Economics, Journal of Law and Economics, Journal of Politcal Economy, and the American Sociological Review, along with

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proof through graphs, formulas, and real-life examples, the authors successfully proved their thesis. The purpose of this chapter was to advise and prove to others in Corporate America the importance in an complete contract and cooperative investment. In the end, the authors proved to the best of their ability using multiple avenues of proof the importance of a complete contract and cooperative investment.