JA-BUSINESS ORGANIZATIONS

JA-BUSINESS ORGANIZATIONS - Business Organizations...

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Business Organizations Professor Perino By: Jeffrey J. Amato I. Economic and Legal Aspects of the Firm A. Introduction Sole Proprietorship – Single owner owns the business directly. Business Organization – Something other then an owner, employees, joint ownership, indicates a business organization. Business Law – Purpose is to protect the reasonable expectations of people who jointly own a business. Mandatory rules – Rules that always apply are few and far between in business law. Default rules – Unless provided otherwise the default rule applies, these can be contracted around. B. Economic Backdrop 1. Comparative Search for Best Investment Ex ante decision – Deciding before the known outcome Ex post decision – Deciding after the outcome (litigation). 2. Risk and Return Risk – The future returns are uncertain. Expected Return - To figure out the expected return you multiply each possible outcome by the probability that it will occur and then add them together. The greater the range of outcomes, the greater the risk. This works well with recurring investments such as mutual funds, but not as well on investments like who wants to be a millionaire. Minimizing risk – Increasing the probability of return or increasing the amount of return Risk preference – Risk preferring, neutral, or adverse will be affected by the personal situation of each investor. The riskier the investment the higher the expected return has to be in order to induce the person to make the investment. 3. Transactional Costs and Choice of Organizational Form Transactional Costs – Given the different costs, which type of organizational form is the best. 1 Possible Return (X) Probability= Expected Return
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Bounded Rationality – The limits of each individuals rational decision making Opportunism – Partners taking advantage of other members Team-specific investment – Investment is team specific if and to the extent that the investment has a lesser value if re-deployed outside the team. Example: Coal mine/railroad/power plant will only work if brought together in a team. Implicit Teams – Parties deal with each other on an individual transactional basis. Discrete Contracting – Discrete contracting tries to foresee all the possible problems, but is limited by bounded rationality. There is also a greater risk of opportunism when the contract fails to account for a situation Relational Contracting – Contract that sets up mechanisms for dealing with unforeseen contingencies. Firms C. The Sole Proprietorship and the Law of Agency 1. Agency Law § 1. Agency; Principal; Agent (1) Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act (2) The one for whom action is to be taken is the principal (3) The one who is to act is the agent Relationship formed between parties, the agent acts subject to the principal’s direction.
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JA-BUSINESS ORGANIZATIONS - Business Organizations...

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