When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial

When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to the state. In cases where the incumbent manager was the winning bidder, firm productivity tended to increase dramatically. When outside bidders won, there was little productivity improvement. Assume that incumbent managers and new managers had similar qualifications. True or False: This result is an example of the winner's curse.

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  1. True

    Explanation:

    Winner curse is a situation where the bidder win the bid in an auction that exceeds the true worth or intrinsic value of the item auctioning. In the given scenario the inside managers bid for realistic performance. The outside managers tend to bid for higher performance to get the job. They does not seem to be realistic.

  2. True

    Explanation:

    Information asymmetry occurs when one of the two parties in a transaction has more information than the other. This causes the person that has the least information to likely make bad decisions.

    In the question, we have an example of information asymmetry: incumbent managers simply have more information about the companies, because they have actually worked in managing them.

    Outside managers, while as qualified as incumbent managers, do not have as much information about the companies, because they have not actually worked there.

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