Fama & Jensen

Question 1

Organization is

Answer 1

exus of contracts. Focuses on contracts that
○ Allocate the steps in an organization’s decision process
○ Define residual claims
○ Set up devices for controlling agency problems in the decision process

Question 2

Central Hypotheses

Answer 2

1. Separation of residual risk bearing from decision management leads to decision systems that separate decision management from decision control.
   2. Combination of decision management and decision control in a few agents leads to residual claims that are largely restricted to these agents.

Question 3

Decision Management:

Answer 3

Initiation & Implementation

Question 4

Decision Control

Answer 4

Ratification & Monitoring

Question 5

Combination of Decision Management and Control

Answer 5

When it is efficient to combine decision management and control functions into 1/few agents, it is efficient to control agency problems between residual claimants and decision makers by restricting residual claims to the decision makers.

Question 6

The Role of Specific Knowledge

Answer 6

Most organizations that have separation of residual risk bearing from decision management are complex; specific information is spread out throughout agents in organization.

Delegate decision functions to managers in all levels of organization vs select few.

Control of the agency problem of such diffuse decision systems is then achieved by separating decision control vs decision management. Incentive structures that reward agents for initiation and implementation of decisions and for ratifying and monitoring the decision management of other agents.

Question 7

In complex organizations, residual claims are diffused among

Answer 7

many agents. Separation of residual risk bearing from decision control creates agency problem between residual claimants and decision agents. Diffusion of separation of decision management and control have suvival value in complex orgs as they allow specific knowledge to be used at the points in the decision process where it is most relevant.

Question 8

Separation of Residual Risk bearing from decision making =

Answer 8

separation of ownership and control. Common in organizations like large professional partnerships, etc. Central block of the diffuse decision control systems of complex organizations are formal decision hierarchies.

Question 9

Boards are

Answer 9

common apex of decision control systems or organizations. They do not bear a major share of the wealth effect of their decisions. Collusion between top-level decision management and control agents more difficult and they re the mechanism that allows separation of the management and control of the organization’s most important decisions.