A great majority of social and economic relationships are of the principle agent type. The principle-agent problem is a game-theoretic situation where; there is a player (the principal) and one more other players (the agents). This is the problem of how the principle can motivate the agent to act for the principles benefit rather than follow self interest. “The problem is how to devise incentives which lead to report truthfully to the principle on the facts they face and the actions they take
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Solutions Manual to accompany Accounting Theory 7e BY Allan Hodgson‚ Victoria Wise John Wiley & Sons Australia‚ Ltd 2010 Chapter 11: A positive theory of accounting policy and disclosure THEORY IN ACTION Theory in Action 11.1 Objections to crackdown 1. What are the likely components of a chief executive officer’s (CEO) management compensation package that might be affected by the proposed changes? It is most likely that the cash component of CEO compensation packages would
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reasonable capital structure can maximize the value of a company through a series of approach. According to a series of capital structure theories‚ the way that capital structure affects corporation value can be described from different perspectives (Margaritis‚ D. & Psillaki‚ M. 2010). 2.1 Form the perspective of capital cost The traditional Net Income Theory holds the view that due to the lower debt cost compared to the equity cost‚ the increase of debt ratio in the capital structure can
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THE DUTIES OF THE AGENTS TO PRINCIPAL The duties of an agent depend primarily on the contract of agency if there is one. Subject to any such express terms‚ the agent owes a number of implied duties or obligations to his principal. It is the agency relationship as such that gives rise to these obligations so that‚ as a general rule‚ they fall as much on the gratuitous agent as on the paid agent. 1. Obey the Principal’s instructions Section 164 states‚ The agent must obey the instructions given to
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SELF-INTEREST‚ ALTRUISM‚ INCENTIVES‚ & AGENCY THEORY Michael C. Jensen Harvard Business School MJensen@hbs.edu Abstract Many scholars‚ business people‚ policy makers‚ and religious leaders are suspicious of self-interest and incentives and often oppose the use of incentives to motivate managers‚ employees‚ public servants‚ or the public itself. I address here some of these issues regarding human nature and organizations raised by Michael Brennan (1994) in “Incentives‚ Rationality‚ and Society
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Chapter 14 Questions 1. A principal-agent relationship is a relationship where an agent makes decisions that affect the principal. Examples of explicit principal-agent relationships are the relationships between a client and a lawyer and between an investor and a money manager. Examples of implicit principal-agent relationships are an employee acting on behalf of its employer and a consumer making decisions‚ such as copying and selling a product‚ that can affect a manufacturer. 2. The
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elaborate upon the duties that a principal owes to an agent. Answer: An agency is the creation of a contract entered into by mutual consent between a principal and an agent. By agency‚ a principal grants authority to an agent to act on behalf of and under the control of the principal. A principal owes certain contractual duties to his/her agent by an agent will serve the principal loyally and with obedient. The principal duties can be found in section 172
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rejected warnings from whistle-blower John Jack‚ costs escalated and components of houses were downgraded without Navy approval. Navy couldn’t get documentation out of American Eagle‚ Navy didn’t act quickly on information from John Jack. Principal-agent theory. In this time of ever more scarce government resources‚ the idea that one level of government can mandate the activities and therefore resource usage of another may seem counter-intuitive. Taken together with the politics-administration dichotomy
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Principal –agent conflict arise because managers & shareholders view the role of the corporation differently. Investors see corporation as investment vehicles. Shareholders want corporate managers to work diligently and efficiently towards the simple goal of maximizing the value of their ownership stake. However‚ the relationship between the managers of a corporation and its owners is complex. The principle of self-interested behavior tells that people‚ including managers and stockholders‚ work
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between the seller / the principal and the representative / the agent is governed by the Law of Agency. A fiduciary relationship created under the law of agency in which one person has a legal authority to act for another‚ can arise from1. 1. An oral or written expressed agreement‚ whereas agent is appointed by the principal for a particular task‚ 2. Ratification of an agent’s conduct that the principle didn’t authorise‚ 3. Implied agreement created by assumed agent authority to enter into
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