control and agency Flashcards
1
Q
How does neoclassical economics treat business ownership and risk?
A
2
Q
What’s the main problem of work specialisation and of imperfect information in relation to agency?
A
3
Q
What is an agency relationship?
A
4
Q
What is the agency problem?
A
-interests of the agent and the principal diverge
-principal cannot freely monitor the action of the agent
thus the principal must make sure that agents are incentivised properly
5
Q
How are business relationships structured?
A
they are structured as to enable principals to exert a control on the actions of agents + to align the interests of agents and principals
6
Q
What is the transparency paradox?
A
7
Q
What are the sources of agency cost?
A
- monitoring costs by the principal
- bonding costs eg stock options
- residual loss
8
Q
What triggers those costs ?
A
- hidden action eg. moral hazard
- hidden info eg. adverse selection
9
Q
What are the limitations of agency theory?
A
- the agency framework only considers the agent and its principal as the only relevant parties eg bonuses impact negatively other employees as they won’t receive their share of profits
- it’s hard to measure an individual’s marginal product
