Talia Owns the Largest Producer of Ice Cream in Easteros: Economics Essay, SMU, Singapore

Question 1

Talia owns the largest producer of ice cream in Easteros. She currently relies on several small manufacturers to produce the packaging for her products. She has contracts with each of her manufacturers and has quarterly meetings with them to discuss business for the next quarter. Other than this interaction, she has little oversight over their work.

Over the last year, Talia’s business has boomed, and she is wondering whether she should begin packaging her product in-house. Write a brief recommendation to Talia, highlighting the costs and benefits of vertical versus horizontal integration. Your submission, excluding in-text citations and your list of references, may not exceed 250 words.

Question 2

Many countries have foreign aid programs that provide financial or other resource assistance during humanitarian crises. The Parliament of Easteros has voted that an annual sum of £30 million should be allocated to global humanitarian crisis responses. The humanitarian crisis in the Democratic Republic of Congo (DRC) will be the focus of donations for the next three years.

To familiarise yourself with global humanitarian aid, use the following resources:

• The Global Humanitarian Assistance Report: Explore the GHA report, which provides an overview of humanitarian assistance in 2018. Pay particular attention to the executive summary and “Chapter 4: Effectiveness, efficiency, and quality”.
• The humanitarian crisis in the DRC: Read this brief article for context on the current humanitarian situation in the DRC.

Imagine that you are the minister of international development of Easteros. After the vote in Parliament, you were allocated the £30 million per year to spend on assisting vulnerable groups in the DRC for a three-year period. You have identified three possible strategies:

1. You can set up a new governmental agency focused on humanitarian crises. The mandate of the agency is to use the annual £30 million to identify and work directly with vulnerable groups in the DRC. Where it is impossible to intervene directly, the agency is tasked with identifying partner organizations in the region and then monitoring and enforcing the responsible use of Easteros’ humanitarian assistance.
2. You can pledge £30 million to one of the specialist UN agencies, such as the United Nations Development Programme (UNDP), the World Food Programme, or the United Nations International Children’s Emergency Fund (UNICEF). Easteros will be contractually obligated to provide £30 million annually for the next three years. The assistance that you provide will be used according to the mandate of the agency that you choose, and you will not be able to directly influence or monitor this spending.
3. You can give the £30 million directly to the government of the DRC each year. You may be able to influence the government to use the financing for certain priorities, but it will be difficult to enforce this agreement at a later stage. You will rely on government officials in the DRC and other third parties, such as journalists, to provide you with information about the use of these funds.

Write an essay detailing the strategy that you would choose in this situation. Your essay should:

• Highlight the principal-agent relationship in the strategy;
• Mention one or two institutional features that you would consider putting in place in order to minimize the agency costs and maximize the benefits of delegation; and
• Apply the theory you learned in this module, such as shirking, slippage, lock-in, externalities, enforcement, monitoring, and institutional incentives.