| firm | a local point for a set of contracts |
| organisational structure | contrafes specify a firm's organisational architecture (decision right, performance evaluation, reward system) |
| free rider problem | shrinking in group activities can reduce team output, comparable to cartel. |
| incentive problems | agents do not act in the best interest of principals automatically.
examples:
owner vs. manager = profits or salaries and perks + take chance or play it safe
buyer vs. supplier = dedicated assets (hold up problem)
management vs. labor: shrinking
controlling incentive conflicts:
1. detailed contract
2. contracts aligning the incentives of all parties
3. building long-term relationships/reputation
4. market for corporate control |
| agency relationships | consist of agreement under which one party, the principal engages another party, the agent, to perform some service on the principal's behalf. |
| agency problems | after the contract is set, agents have incentives to take actions that increase their utility at the expense of the principals. e.g. fire insurance, real estate, mechanic. |
| agency costs | costs because the principal cannot observe the actions of the agent.
1. monitoring costs: costs made by principal to limit asymmetric information (hiring auditor, fire inspection)
2. bonding costs: costs are made by agent to show principal that agent is committed to the principal's goals (ISO standards, fire precautions) |
