sAgency(32p) - The corporation Nexus of contracts and...

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The corporation Nexus of contracts and transactions Board of Directors Managerial Labor Market Market for Corporate Control Production Function Capital Market Stockholders Bondholders Factor Market (Labor) Product Market (Customers)
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Adam Smith Wealth of Nations , 1776 The trade of a joint stock company is always managed by a court of directors. ...The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which partners in a private copartnery frequently watch over their own. ...Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
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Berle and Means The Modern Corporation and Private Property , 1932 As we have seen, it is no longer the individual himself who uses his wealth. Those in control of that wealth, . ..are no longer, as owners, entitled to the bulk of such profits. Those who control the destinies of the typical modern corporation own so insignificant a fraction of the company's stock that the returns from running the corporation profitably accrue to them in only a very minor degree. The stockholders, on the other hand, to whom the profits of the corporation go, cannot be motivated by those profits to a more efficient use of the property, since they have surrendered all disposition of it to those in control of the enterprise.
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Mathematical Example Principal hires the agent to perform some task. The Agent has certain capabilities in comparison to the principal. The Agent possesses information that the principal does not. The trick is to write a contract so that the agent 1) Chooses to work for the principal. 2) Works with the right effort level. To do this, we need some measure of 1) How much the agent likes wages. 2) How much the agent dislikes effort. We call this a utility function
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In words, the agent likes wealth and dislikes effort. We can create a function of wages and effort that shows this trade-off. U(w,e) = sqrt(w)-e
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This note was uploaded on 04/02/2009 for the course DEPARTMENT FIN 4320 taught by Professor Sherwoodbishop during the Spring '08 term at Southwestern.

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sAgency(32p) - The corporation Nexus of contracts and...

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