problemset1 - Matt Cantor Problem Set 1 Due I Provide a...

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Matt Cantor Problem Set 1 Due September 12, 2007 I. Provide a brief description of each of the following concepts. a. Agency Costs – In any organization in which there principals and agents, there will be issues in which both parties don’t agree on. When studying corporations, agency costs come from the relationship between managers and stockholders. The three components of agency costs are: i. Monitoring costs – costs of trying to control the manager’s behavior in order that he acts in the best interest of the stockholders ii. Residual costs – costs of the managers misusing corporate resources (Departures from the optimal amount of resources and effort) iii. Bonding Costs – It may be prudent to pay the agent to guarantee that he/she will not take certain actions to harm the principal or to guarantee that the principal will be compensated if she does. b. The firm as a nexus of contacts – The firm can be viewed as a central network of contracts. These contracts are with a number of different sources – owners, suppliers, employees, etc. Since the firm has the right to make legal contracts with these sources it is an individual entity. Thus, it can be sued and treated legally like an individual.
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