Lecture 3 Flashcards
3 categories of transaction costs
- Search and information costs
- Bargaining costs
- Policing and enforcement costs
General transaction costs
Bounded rationality
Bounded reliability
Specific transaction costs
- Asset specificity
- Uncertainty/ complexity (high uncertainty, internalise, because of high contracting costs)
- Frequency of use
Agent
Someone you hire to do a job for you
Agency theory (Berle and Means, 1932)
The problem that arises when shareholders and managers have different goals
Principal- agent problem arises when
- Principal pays the agent for certain acts that are useful for the principal, but costly for the agent
- There are elements of the performance that are difficult for the principal to observe
Agency costs increase in any contract with…
- Information asymmetry (adverse selection and moral hazard)
- Uncertainty
How to solve for agency
- Fully specify all contracts
2. Monitor all agents of the firms
Why contract a local distributor?
To minimise up-front risk, he can provide us with the local market and potential major customers at a low cost.
Beachhead strategy
Places the responsibility to succeed on the FDs shoulder. We give him control over the strategic and marketing decisions and hope for the best.
What is the vicious circle with a FD
- Lack of long-term commitment, because FD knows he will be kicked out if he is successful
- Reduces the abilities and efforts made by the FD
- Which in turn reduces the probability that entry will succeed
How to solve the agency problem with a FD
- Recognise that the phases are predictable
- Align the firm’s and the FD’s interests
Benefits of a strategic alliance
Same benefit as FD, but due to mutually binding commitments, an additional benefit of knowledge creation
Learning race
Each partner aims to extract resources from the other
2 factors show how easily the firm’s advantages can be transferred
- Mobility, how easily can it be stolen or shared?
- Embeddedness, if transferred, how easily can it be understood or absorbed