Monday, October 13, 2008

Information Flows

Our football team has had a fairly disappointing year. Rightly
or wrongly, people blame the head coach and have been calling for his
dismissal. They have been complaining about how much he was paid, and
that he had a long-term contract.

At the end of the big economics class, right after the professor
dismissed the class, some guy stood up and announced "Bowden got
fired!" About half the class started cheering. The professor did not
seem to mind.*

As I was walking back to my office, I noticed a greater than usual
amount of people talking on mobile phones, and overheard at least two
comments about the dismissal. One of them was about how the
university had to pay to buy out his contract. I estimate that
everyone on campus who cared about football knew the fact within the
hour of its announcement. Out of curiosity, I checked Wikipedia
shortly after I got back to my office. It had already been updated.

I decided to get in on the action. The homework assignment that I
give out tomorrow will include the following problem:

Problems 18-20 use the following information. You are a football
coach. You are currently working at C--- University, and you have
a contract promising you $2 million per year for the next three years.
You are paid a lump sum at the beginning of the year. (The first
year's salary is not discounted). The interest rate is 10%. You know
that you could get a job at another school that paid $1 million a year
for the next three years, in lump sums at the beginning of each year.
18. What is the net present value of your C--- contract?

19. What is your opportunity cost of working at C---?

20. If C--- decides to buy out your contract and dismiss you, how
much must they pay you?

* Texting on cell phones and messaging in laptops are endemic in the
class. The professor makes no attempt to stop it, as long as it does
not disrupt other people. But if your cell phone rings, he will make
you stand up and apologize to the class.

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