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Quiz%205%20and%206 - Quiz 5: Mechanisms for Controlling...

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Quiz 5: Mechanisms for Controlling Managerial Opportunism Internal Mechanisms: limitations in italics Payment by results (can emphasize quantity over quality) Monitoring (costly) Managerial re-organization (limits specialization) “Do-it-yourself” (shareholders may not possess necessary skills) Efficiency wages: increases productivity by paying above market-clearing wage, increases cost of job loss, minimizes turnover ( expensive) Bonding (e.g., seniority based wage): enables workers to signal competence, which reduces adverse selection ( not always possible for senior employees to bond) External Mechanisms: Takeover threats: incompetent management will lead to suboptimal value creation, which will lead the firm to be bought by outsiders, which causes opportunistic managers to lose their jobs ( uncertainty regarding takeovers, delayed punishment) Lenders and bankruptcy threats: bankruptcy threats motivate higher effort, as bond covenants
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