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Topic06_Organization

Topic06_Organization - Topic 06 Topic 06 Organization of...

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Topic 06 O i ti f th Fi Organization of the Firm COMM 295 Ratna K. Shrestha
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Overview During the economic crisis of 2008 and 2009,US government bailed out many insurance and auto companies. AIG (America International Group) received more than $173 billion federal funds to prevent bankruptcy. f f G Despite the failures of AIG and many other firms, many executives from those firms receive a huge amount of bonuses receive a huge amount of bonuses. This raises the question if such reward is justified?
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Overview z In response, Obama administration imposed restriction on executive compensation in government bailed out companies. z Critics argue that such restrictions will provide no incentives to the managers or workers to work hard work hard. z So the questions is how can the managers provide incentives to workers (or owners provide incentives to workers (or owners provide incentives to managers) to put forth maximum effort?
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Principal Agent Problem z If the owner is manager as well then their objective is the same (profit maximization) and there is no problem. z However, if managers are not owners, they maximize their own compensation (not the ’/f f ) owners’/firm’s profits) and this can create a problem especially when the owner (principal) cannot monitor manager’s (agent) action cannot monitor manager s (agent) action. z In the absence of monitoring, the agent can act opportunistically (shirk or not work hard) act opportunistically (shirk or not work hard).
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