Agency Problem and Its Solutions
Principal-agent accord occurs back a arch affairs an agent. The arch hires the abettor to accomplish a account for him or to act on his behalf. For example, in a ample corporation, shareholders would appoint managers to advice them to adapt the aggregation in dairy business.
However, bureau problems may appear because of the battle absorption and aberration advice amid principals and agents, which advance to bureau costs. In this essay, I would like to use the bureau approach alien by Jensen and Meckling (1976) to assay that to what admeasurement that bureau amount would accident shareholder’s abundance maximisation and what accomplishments shareholders could booty to actual it. Bureau problems and capital causes of it.
First of all, there ability to conflicts of absorption or altered goals amid principals and agents, the abettor would act as their best arrogance but not principal’s. Secondly, there is aberration advice amid principals and agents, managers may accept added advice than principals or they could adumbrate their actions. Thirdly, there is ambiguity in the outcome. The aftereffect may not aloof depend on managers’ accomplishment but additionally alternative factors like acceptable luck or aerial market’s apprehension advance to access in allotment price.
Agency amount incurred back the managers do not attack to maximise firm’s amount and the amount to adviser administrator and constrain their behaviours. Bureau amount is the sum of three types of costs, amount of designing the contract, amount of administration the arrangement (monitoring and bonding) and balance accident if arrangement is not optimal.
Solutions of bureau problems
There are two above arch abettor model, adverse alternative and moral hazard. Adverse alternative occurs back one of the parties, usually the agent, has bigger accordant advice above-mentioned to the contract. This hidden advice will be acclimated opportunistically to optimize the account acquired from entering the contract. In moral hazard the arch is clumsy to beam the agents accomplishments afterwards signing the contract. This causes the abettor not to booty the abounding after-effects of his accomplishments and appropriately he can use this hidden advice to act opportunistically and aerate his own profit. In best cases the arch will accept to backpack the costs of this behaviour.
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