OFFICE HOURS MON. 10:15 - 11:45, WED. 11:15 - 11:45/ NJ HALL 420
220:203 or 320 (Intermediate Microeconomic Analysis) and 220:322 (Econometrics);
This is an upper-level economics elective.
Reference Text (optional):
, Robert A. G. Monks and Nell Minow, Blackwell
Publishing, third edition (paperback), 2004 or fourth edition (paperback), 2008.
Required Daily Reading:
Wall Street Journal
Theories and evidence of the effect of agency problems on the economic
performance of firms and on the role of internal mechanisms (board of directors, managerial
compensation, and financing) as well as external forces (product markets, capital markets, and
labor markets) in disciplining managerial inefficiency at for-profit and not-for-profit organizations,
mutuals, and cooperatives.
The separation of management from ownership plus the outside owners’ lack of
information about how a firm’s managers run the firm give managers discretion to pursue
objectives that reduce the market value of their firm.
These objectives include consuming
perquisites, avoiding effort, building empires, discriminating prejudicially, making incompetent
investment and production decisions, and taking too much or too little risk to protect their control
over the firm’s assets.
As Adam Smith noted in the
Wealth of Nations
, “The directors of such companies, however, being
the managers rather of other people’s money than their own, it cannot well be expected, that they
should watch over it with the same anxious vigilance with which the partners in a private company
frequently watch over their own.
Like stewards of a rich man, they are apt to consider attention
to small matters as not for their master’s honour, and very easily give themselves dispensation from
Negligence and profusion, therefore, must always prevail, more or less, in the
management of the affairs of such a company.”
The enduring success of the corporate form of business organization stands in contrast to Adam
Smith’s pessimism. Is it possible that the Invisible Hand of markets disciplines managers tempted
by negligence and profusion (extravagance)?
• Do product markets punish bad managers with weak demand for their products?
• Does weak performance that causes a firm’s market value to fall below its potential value attract
the attention of outsiders who try to take over the firm or to purchase a sufficiently large block
of shares that they acquire the power to replace bad management and increase the firm’s value?
• Does a firm’s weak performance erode the reputation of its managers and reduce their ability to
compete in managerial labor markets?
• Does the board of directors pay attention to the potential for negligence and profusion – perhaps