EconomicsofBusinessDecisionsLecture3AgencyTheoryoftheFirm
PreviewReviewOverviewOwnerconsumptionandownershipShirkingandownershipPublicownershipCompensationSampleExamQuestion
Behaviouraltheory,firms:Arecomprisedofmanycompetingstakeholders;Eachwiththeirownobjectives;andDifferentinformationaboutopportunities(e.g.wagesoutsidefirm).Managerialtheoryemphasisthat:Ownershipoflargefirmsishighlydiversified;Managersownaverysmallpartofthesefirms;andManagerialbehaviourisonlylooselyconstrainedbyshareholdersSufficingisanimportantalternativetomaximisingbehaviourReview:ManagerialandBehaviouralTheories
ActivitiesAssignmentsOverviewL3:AgencyTheoryPositiveTheoryNormativeTheoryEntrepreneurialFirmPublicCompanyOwnerconsumptionShirkingFrameworkNaivebuyerSmartbuyerTeamsMonitoringOwningSymmetricinformationAsymmetricinformation
TechnicalPersonalSolutionFrameworkNaivebuyerSmartbuyerOwnerConsumptionandOwnership
TechnicalParta=PVofhourssaved=200hours@$1,000=$200,000x10yrs=$2mb=PVoffaressaved=50hours@$2,000=$100,000x10yrs=$1mc=PVofbuyingandoperatingthejetc1=$300,000x10yrs=$3mc2=$600,000x10yrs=$6md=PVofownerconsumption=c-a-bd1=$3m-$2m-$1m=0d2=$6m-$2m-$1m=$3mabcabcd2Example:buyorrentoffirm’sprivatejetdecisionandmanager’sconsumption
ResourcesarefixedWageofmanagerisfixedTechnicalPartValueofthefirm($m)PresentValueofmanager-ownerconsumption($m)10V=10FV
PersonalPartI1I2I3ABCDValueofthefirm($m)Presentvalueofmanager-ownerconsumption($m)VFDiminishingmarginalrateofsubstitution,asownerconsumptionincreases.
SolutionI1I2I3F*=3V*=7Valueofthefirm($m)Presentvalueofmanager-ownerconsumption($m)VF10V=10
Na?vePurchase37Valueofthefirm($m)Presentvalueofmanager-ownerconsumption($m)VF1010Managersells(1–α)tooutsiders;letα