10-21-09 - Economics 448 Class Notes The difference between...

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Economics 448 – Class Notes – 10/21/09 The difference between price mechanism and Alchian and Demsetz: * Team production process within the firm * Observing output * Observing input High-powered incentives: A higher-wage --> we want to motivate people to work --> provide incentives to work harder High-powered incentives high power to elicit an effect tend to act as signals to employees Low-powered incentive: A flat-wage --> a wage is given regardless of how hard you work A question for Alchian and Demsetz to answer: Who monitors the monitor? We have a monitor to monitor workers’ efforts and work, but we need a central- contractual agent that has responsibility to watch workers The following is a “Nexus of contracts” definition of the firm: the owner or boss is the central agent that has all of the following responsibilities o DEFINITION OF OWNER or BOSS : We need a residual claimant at the top of the hierarchy of the firm organization The BOSS or OWNER of the firm This person observes input effort Central contracting agent Can hire and fire workers Can sell ownership rights Residual claimant: The residual claimant in a corporation the stockholders are the residual claimants in a corporation the residual claimant gets whatever is left over after paying all costs and benefits The classical capitalist firm [consists of] (very much similar to the definition of the owner): a.) Join input production b.) Several input owners c.) One party who is common to all the contracts of joint inputs d.) Who has rights to renegotiate any input’s contract independently or contracts with other input owners e.) Who holds the residual claim, and f.) Who has the right to sell his central contractual status
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This does not describe what is really going on inside of a corporation-type of firm A partnership is not as cleanly defined as a single owner of a firm: There are multiple residual claimants o Law firm:
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10-21-09 - Economics 448 Class Notes The difference between...

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