Gibbons recalls the 1992 charges by California authorities that Sears' mechanics

were gouging customers by exploiting the mechanics' asymmetric information

advantage to recommend unnecessary repairs to customers and thus earn bonuses. Do

not let this sorry episode destroy your faith in the integrity of the automobile repair

industry but what was the likely cause of these unfortunate recommendations?

a. Mechanics were compensated based on the final condition and expected

lifetime of the customers' automobiles so the mechanics sought to restore

them to pristine operating condition.

b. Sears' mechanics often had no idea what was wrong with the vehicles and

took the defensive strategy of replacing everything remotely involved in

the malfunction.

c. Sears' mechanics were compensated on the basis of profits from the

repairs performed in the shop, a plan that successfully aligned agent and

principal objectives, while regrettably damaging those of the customers.

d. It was all a terrible misunderstanding