08.08.2019
 Organizational Structure  Principal-Agent Problem Article

2. Organizational framework + Principal*-Agent problem

Principal-Agent Problem

There is separation between control & control in most in the firm that individuals see today. As owners, shareholders designate managers to make decisions for the business. There is one more term to describe relationship together. Shareholders are definitely the PRINCIPAL that appoints the manager (AGENT) to act on the shareholders' account so that earnings can be maximize. E. g.

Patient-Doctor

Managers-Employees

Buyer-Housing Agent

Voters-Politicians

Principal & agent are a couple of different parties. With that, distinct objectives will likely occur. In the case of shareholders & managers, investors wants to increase profit but managers may want to maximize product sales, their prestige, status, comfort and ease, etc . The down sides between the shareholders & managers can be illustrated by two economic concepts: Adverse Selection

Moral Hazard

I. Adverse Selection

Shareholders need to appoint managers to perform their company. For this, investors will execute an interview to invite potential managers to take up the job. During interview, investors face difficulty. There is plenty of hidden data which the shareholders do not know—Ability to manage organization, conduct of the person, hard work that the person will placed in, character, aim of the managers. There are ways to reduce this CONCEALED INFORMATION difficulty: Shareholders might require managers to provide information on their particular educational background, references from previous career, a list of earlier achievements Therefore, the shareholders are able to evaluate the managers better. Despite all the steps, shareholders can never get full information about the managers. II. Moral Danger

When the manager is appointed, the shareholders confront a different trouble. Shareholders are unable to observe all the actions & decisions taken by the managers. A administrator may use...