Aveneu Park, Starling, Australia

Within erased the answers (that were marked in

Within case study one, we see several dilemmas revolving around the theme of rationality
and whether or not someone should cheat in different situations. Furthermore, the key
decision makers present within the dilemma include the teacher, the sumo-wrestler and Paul
Feldman, all of which, have differing incentives that determine the outcome of their
decisions. In addition to this, the role of governance structures and greater institutions
impact the decisions greatly, as they control both the attributes of the transaction and the
consequences of certain decision making outcomes.
Firstly, for example, there is the case of a teacher considering whether to cheat to improve
their students results. Initially, the incentive for this would’ve been, perhaps, in good nature
where the teacher believes they are helping the students by giving them better results. The
(more likely) alternative and self-extended approach is that their incentives could include that
good results would make them appear as more capable of their job. The introduction of highstakes
testing within schools in Chicago amplified the effects of incentives for school
teachers’ pupils to achieve highly. By this point, if a teacher’s pupils achieve highly, the
teacher maximises the potential for economic reward (such as the $25,000 bonus) –
however, teachers with pupils achieving poor grades will likely lose their job as it reduces
funding to their school. This amplification of incentive was also likely, as Levitt and Dubner
explore, to lead to teachers cheating.
The Chicago Public School system (CPS) agreed to allow their database to be statistically
analysed to try to identify whether any cheating had taken place. The algorithms had
discovered that 200 classrooms had been caught cheating, or more that the teacher had
been caught cheating. In the, roughly, one hour period between the pupils finishing their test
and the tests being handed in to be marked by a machine, the teacher had erased the
answers (that were marked in pencil) and had replaced them with the correct answers. The
idea behind Levitt & Dubner’s “Freakonomics” is to prove that economic theory can be
transferred to explain scenarios from everyday life to peculiar (and sometimes even sinister)
case studies; in this case the transaction between the teacher and her pupils, their parents,
and the CPS can be explained through Akerlof’s (1970) theory of “Asymmetric Information”.
Akerlof introduced the idea of information as a commodity in 1970 as a foundation for a
plethora of economic theories to follow. In the case of the school teacher, the asymmetry of
information lies in the fact that only they are aware that they have cheated; the students
never receive their papers back so they aren’t in a position to say that their marks have been
changed. Likewise, the teacher is the only person who handles the paper from the moment
the students finish the paper to the moment they get handed in for marking; this means that
other teachers and certainly the parents of the students will certainly be unaware of any foul
play. Additionally, since the tests are marked by a computer, the computer is also unlikely to
detect when a series of answers has been changed.
The main way that the asymmetry of information was counteracted was that the CPS
documents and records all of the tests completed by schools in Chicago in every detail on a
database, including individual answers. Whilst no one had any suspicions at time, at least
the scores were documented to be revisited in cases such as this where, in hindsight, the
results didn’t make sense. Now the argument needs to be made on whether the CPS, a
figure of the wider institutional environment (Williamson, 2000), should have been more
responsible in giving these drastic incentives to achieve highly, or in some cases not to fail. If
the CPS felt that offering these amplified incentives was necessary in order to bring out the
best in their teachers, it can be argued that they should have been less naive and perhaps
should’ve expected some teachers attempting to cheat; especially given the lax regulation
surrounding what happens with the papers between the end of the test and being marked.
Going forward, the CPS should look at finding external bodies to administer the tests. If they
choose against this, they should consider automatically applying the algorithm (that originally
confirmed that teachers were cheating) to the papers to ensure no cheating has taken place,
opposed to running it retrospectively years after the tests had taken place. In regard to
rational theory, the teachers could consider the maximum net benefit of their decision, as the
high incentives to cheat would be outweighed by higher rewards of not being deceitful,
causing teachers to put more effort into teaching their students than relying on cheating;
which in turn, would be that the students would receive a better education. This
demonstration of utility maximisation is less apparent in other cases within the text.
In the case of Paul Feldman and his customers, the transaction was much simpler, and
Feldman had little focus on what he would gain from the transaction, but more so an interest
in the relationship between the buyer and seller. As described in the study, the customers
knew Feldman, and viewed him positively, which made a big difference to the attributes of
the transaction. In Akerlof’s (1970) paper, ‘The Market for Lemons’, we see the intimate
nature of the relationship between local moneylenders and their customers in India, and how
the customers still choose to operate with the money lenders who charge extortionate rates
rather than banks set up through the ‘Cooperative Movement’, due to the relationship and
the transparency that the local money lender offers. In reference to transaction cost
economics, this level of transparency greatly reduces the level of contextual uncertainty, an
attribute of the transaction, which in turn reduces the transaction costs.
In Feldman’s case, the same transparency occurs, reducing substantive uncertainty, and
transaction costs. However, this doesn’t mean the costs are completely eliminated, as
although the customer’s (the buyer) uncertainty may have been reduced, this isn’t
completely true for Feldman (the seller) who’s contextual uncertainty increases depending
on where he sells the bagels. For instance, he found that in small offices where he sold the
bagels, there would be less chance of theft, where as in big offices, the opposite occurred.
Therefore, the economic effects following Feldman’s uncertainty due to site asset specificity
during the transaction include higher costs of safeguarding the transaction (and ensuring
that Feldman receives payment for the bagels), a ex-post cost, both economists Oliver
Williamson and Douglas North acknowledge. In order to reduce these costs, it is important
for Feldman and the customer to adopt a governance structure, in this instance, a firm
should be used due to the high level of uncertainty occuring within the transaction, however,
Feldman doesn’t care too much about the small losses he occurs, due to people not paying
for bagels, and therefore operates in a hybrid structure, where he cooperates with his
buyers, whilst preserving his autonomy. Therefore, in reference to Borgon and Hegrenes
coordination mechanisms (2005), the coordination in the relationship seems to operate on
When compared, similarities can certainly be drawn between the two discussed cases. For
example, in both scenarios, cheating is easily facilitated – the school teachers aren’t
monitored and can therefore easily alter the results of their tests without anyone finding out,
likewise Feldman’s customers can take a bagel without anyone knowing. The differences lie
in the fact that Feldman lost very little stock/profit to cheating, whereas the stakes were
much higher and severe in the teacher’s scenario, as the Chicago school system suffered
from teachers cheating. You would presume cheating would occur more often in cases
where the consequences are less severe, as demonstrated in the case example, in which
parents left their children at daycare for longer, because they were only charged a small fine
for doing so. However, in the instance where the consequences can be life altering (such as
not giving a child a thorough education or lulling them into a false sense of security about
their academic abilities), cheating still occurred. This shows, perhaps more sinisterly, that a
true incentive revolves purely around self-interest, and supports Kathleen M. Eisenhardt’s
theory of Moral Hazard, found in the paper ‘Agency Theory: An Assessment and Review’,
that suggests that people will take more risks, when someone else bears the costs, for
instance, the teacher risked cheating, because it would risk the children’s education, not her
own, and the customers would steal bagels, as it wouldn’t affect their own finances, but
Feldmans. In conclusion, I believe that the case study provides excellent examples of
different economic theories revolving around rationality, and that the only limit is a more
detailed explanation of the institutional environment’s effect on the decision making, for
instance, whether specific rules were in place at the offices in which Feldman’s bagels were
situated, or if there is legislation against the ways teachers can determine test results.
Therefore, if I was to conduct further research into the topic, these would be the ideas that
my attention would be focused on.