Lecture 6 & 7

Question 1

complete contracts

Answer 1

comprehensive
enforceable at no cost to the exchange parties
exogenous claim enforcement
characteristics of g/S are easily determined
contractual transgression are detected and redressed

Question 2

incomplete contracts

Answer 2

some aspects of contract are hard to monitor and complex
endogenous claim enforcement
motivational problems arise - resolution of conflict of interest

Question 3

contested exchange

Answer 3

economic transaction characterised by both agency problem & endogenous clain enforcement

Question 4

Employee Rs

Answer 4

effort is attribute
both value it
moral hazard an incentive problems
ex post term of labour contract are determined by sanction & monitoring mechanism ofmanager
contingent renewal as incentive mechanism

Question 5

conflict of interest

separation of ownership and control

Answer 5

owner - maximisation of market value of the comapany
manager - maximise own personal interests( mostly at expense of owner)
SH tend today to be investors rather than owner (focus on risk and return of their stock PF) rather than active owners (focus on business performance)

Question 6

Agency Cost

Answer 6

arise to resolve interest conflict
incur when trying to provide managers with incentive to max. sH welath & monitor their behaviour
sum of all monitor expenditures of the principal, bonding expenditures by the agent, residual loss
residual loss is the redution of the value which arises when entrepeneur dilutes his ownership (key cost)

Question 7

Henry Manne

Market of corporate control

Answer 7

corporate control market as objective standard to measure managerial efficiency
take over schemes provide some assurance of comp. efficiency among corporate managers
wthis affords strong protection to the interests of vast nr. of small & non-controlling SH

Question 8

Maket for corporate control

Mechanism

Answer 8

act as important constraint on management behaviour where SH has little control
disciplinary effect by encouraging managers to improve their performance so as to avoid a takeover and thus subsequent loss of employment

Question 9

Fama´s view of firm

Answer 9

separation of security ownership and control as efficient form of economic organisation within the “set of contract” perspective

Question 10

Fama´s view of managerial control

Answer 10

firm is disciplined throught competitions (external market=) and idv. members face both the discipline and opportunities provided by markets for the service

Question 11

Risk Bearing

Answer 11

rents factors of production
acceptance of uncertain differenece
guarantee performance of their contracts by putting welath ex-ante (invest in capital and technology)

Question 12

ownership

Answer 12

individual security holder will have invested in securities of many firms
less incentive or less interest to oversee detailed activities of each firm

Question 13

management

Answer 13

decision making
overseeing contracts among factors
ensure viability of the firm
no suffer immediate loss/gain in current wages from current performance of firm but impact it´s future wage

Question 14

managerial labour market

Answer 14

rental rates of his human capital is defined by managerial labour market

Question 15

discipline managers

Answer 15

gives managers incentive in participation of success of the firm
weights of the wage revision process is suff. to resolve any potential problems with managerial incentives

Question 16

capital market

Answer 16

markets for own service - share market
allows them to shift among teams with relative low TC
diversifying their holdings across teams

Question 17

incentive problems

Answer 17

inexistence of join job (function)
ex post settling up for deviations in contract (not the same as fair ex ante basis)
managers incentive to consume more on job or receive higher compensation

Question 18

Director´s behaviour as subject to A.P

Answer 18

wish to re-appointed on the board
tendency to go along with CEo incentive packages
having good RS to CEo increase chances to being invited to join other companies boards
lack of easy access to ind. info or advice on compensation packages
limited time - thus rely on info shapned by Hr staff all of whom have an incetive to please incoming CEO

Question 19

Market Limitations

Answer 19

maket forces aren´t suff. strong to assure optimal contracting outcomes( not fine turning)
only impose some constraint what directors will agree or manager is able to ask for
disciplinary force of Corporate control (threat of takeoveR) leaves managers with considerably ability to extract private benefits (acq. related benefits)
CEO perf. with stronger takeover protection are paid larger and less linekd to performance

Question 20

Agency problem contract

Answer 20

not observable/directly control production
physical distance
compensation scheme
post or pre-contractual A.P
Technology or uncertainty affecting production (exogenous which is uncontrollable)
complexity of managerial services (involves intellectual activities ( effort) which is hard to measure)
discrepancies in objectives - both max. their utilities (diff. directions)
corporate governance problem