2017 PhilSci Lecture 7.pdf - Philosophy of Science 7 Tuesday The social meaning and institutions paradigm Prof dr J(Hans van Oosterhout RSM Erasmus

2017 PhilSci Lecture 7.pdf - Philosophy of Science 7...

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Philosophy of Science 7 Tuesday, October 24, 2017 The social meaning and institutions paradigm Prof. dr. J. (Hans) van Oosterhout RSM Erasmus University
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AGENDA 1. Recap and finishing the rational choice paradigm Some key concepts in rational choice theory Application 2: Agency theory in corporate governance 2. The social meaning (and institutions) paradigm Article: the social construction of market value
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The rational choice paradigm J . (Hans) van Oosterhout RSM Erasmus University [email protected]
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Individualism Social Holism Explaining Understanding Rational Choice Epistemology Ontology RATIONAL CHOICE THEORY
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SOME KEY CONCEPTS Methodological individualism Rationality Self-interestedness Behavioral economics Parametric versus Strategic rationality Nash-equilibrium Pareto-optimality Coordination problems Motivational problems
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Agency theory And its application in corporate governance
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FAULT LINES IN HUMAN COOPERATION
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AGENCY THEORY Agency relationships exist if there exists a separation between decision making (by the agent) and being exposed to the consequences of these decisions (the principal). How might this happen? formal delegation of decision rights (e.g employer–employee) de facto delegation of decision rights (information asymmetry, e.g lawyers/doctors vs. clients/patients) Agency relationships lead to agency problems because: Conflicts of interests between agent and principal. Information/knowledge asymmetry (imperfect monitoring) Ex ante: adverse selection (selecting the right employee) Ex post: moral hazard (monitoring employee once hired) Agency problems lead to agency costs Monitoring costs (borne by the principal) Bonding costs (borne by the agent) Residual loss (borne by the principal) The challenge is to minimize the sum of agency costs because agency costs constitute a (welfare economic) deadweight loss
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THE AGENCY COSTS OF CORRUPTION
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CORPORATE GOVERNANCE Agency problems arise in publicly listed firms because of the separation of ownership and control : Publicly tradable shares enable efficient financial risk bearing and the dispersion of ownership (shareholders ‘owning’ portfolio’s rather than firms) Yet liquid and dispersed shareholders can hardly be involved in decision making: delegation to board of directors/managers Agency costs: Monitoring costs: e.g. Board of Directors, shareholder activism, disclosure
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