Week 2 Flashcards
Market
Place where goods and services are exchanged
Market failure is due to…
- Bounded rationality
- Uncertainty
- Opportunism
- Small numbers
Bounded rationality
Limited capacity of decision makers to find optimal solutions to complex problems
–> it affects transaction costs by reducing the potential solutions that economic agents may be able to consider and compare
Uncertainty
Makes it impossible to specify all future contingencies in a contract
–> typically due to ex-ante observability or ex-post behaviour related to contractual execution
Opportunism
Tendencies of parties in a contract to pursue their own interest
Small numbers may be caused by the …
Absence of repeated transactions or the impossibility of competitive contracting
Authority
Someone who accepts to alter or conform their behaviour to someone else’s decisions
Zone of indifference/acceptance
Behavioural “space” within which authority relations occur without conflict
Types of authority (Max Weber)
- Traditional
- Charismatic
- Rational - legal
Describe the principal-agent relation
owners hire managers to perform a task or carry out a project. There is separation between owners and manager
Agency
The principal engages the agent to perform some service on their behalf
What are some solutions to the AGENCY PROBLEM
- Direct monitoring
- Hire the agent and do nothing
- Rent the firm to the manager
- Link compensation to performance
- Profit-sharing
- Deferred compensation
Difference btw shareholders, directors and executives
Shareholders : own the company’s shares
Directors : supervise the activities of the company
Executives : in charge of managing the company
Board of directors
- most boards have at least some managerial function
- monitors and disciplines top management
- provides access to a network of contracts that may be useful in gathering resources and/or obtaining business
What is a firm
It is a nexus of explicit and implicit contracts establishing rights and obligations among the various inputs making up the firm
