03_OverheadsForChen1 - Objectivesfortoday Define critical...

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ACCY 302 (Chen) Fall 2009, Class 03 1 Objectives for today Define critical concepts specific and general knowledge decision rights and alienable rights incentives Understand knowledge, rights, and incentives in firms and markets the "rules of the game" How much decentralization? the first "rule of the game" Application of the "rules"
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ACCY 302 (Chen) Fall 2009, Class 03 2 Critical concepts What are the different types of knowledge? General (inexpensive to transfer) Specific (expensive to transfer) Idiosyncratic: particular circumstances of time and place e.g., skills or preferences of people, specifics of machines Scientific: general rules of cause and effect relations e.g., product design and development Assembled: over time and/or across experiences e.g., personal experiences, history of product's life
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The Economist, April 6, 2002 issue,  page 10
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ACCY 302 (Chen) Fall 2009, Class 03 4
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ACCY 302 (Chen) Fall 2009, Class 03 5 Critical concepts  (continued) What is a "decision right"? right to decide on and take actions with a resource What are alienable (ownership) rights? right to sell a resource and capture the proceeds Why the distinction? these rights are separable those with alienable rights may delegate decision rights to others. .. ...but the rights to sell the resource don't have to tag along in delegation
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ACCY 302 (Chen) Fall 2009, Class 03 6 Critical concepts  (continued) When are decision rights and alienable rights located with: different people? principals who hold alienable rights delegate decision rights to agents e.g., shareholders Board of Directors managers the same person? sole proprietorship in a market
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ACCY 302 (Chen) Fall 2009, Class 03 7 Critical concepts  (continued) What is an incentive? something that encourages or motivates a person to take action How do incentives relate to decision rights? when decision rights and alienable rights are located with different people. .. ...the holder of the alienable rights needs to provide an incentive to the holder of the decision rights. .. ...to take the "best" actions with the resource
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ACCY 302 (Chen) Fall 2009, Class 03 8 Knowledge, rights and incentives  -  "The rules of the game" 1) Allocate decision rights so they're closer to those with specific knowledge of how best to use a resource 2) Create a control system that: a) provides performance measures that yield insights into how the resource was used b) specifies the relationship between the performance measures and rewards and punishments
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ACCY 302 (Chen) Fall 2009, Class 03 9 The First Rule of the Game
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This note was uploaded on 11/08/2011 for the course ACCY 302 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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03_OverheadsForChen1 - Objectivesfortoday Define critical...

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