Jensen1976 - Theory of the firm: managerial behavior,...

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Jensen Introduction: Paper draws on: o Property rights o Agency costs o Finance to develop a theory of ownership structure Theory of the firm: an empty box? Rather theory of markets in which firms are important actors Profit maximization (present value) There is no theory explaining how the conflicting objectives of individuals are brought into equilibrium Some models have questioned the principle of profit/ value maximization But this paper assumes maximization behavior of participants Porperty rights Property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals (wikipedia) Important for this article: specification of individual rights determines how costs and rewards will be allocated among participants in any organization Agendy costs Agency relationship = contract under which principals engage agent to perform some service on their behalf Principal delegates decision making authority to agent Both parties are utility maximizers agent will not always act in interest of principal Principal can limit divergence through incentives and by incurring monitoring costs Bonding costs = agent expends resources to guarantee that he will not take certain actions harming principal $ amount of reduction in welfare for the principal = residual loss Agency costs are the sum of: o Monitoring expenses (borne by principal) o Bonding costs (borne by agent) o Residual loss Relationship between shareholder & managers = agency problem (separation of ownership and management) Agency problem exists in all kinds of org. and at every level of management (government, unions etc.) Attention of this article: only between management and shareholders Existing literature focuses on how to structure relationship
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Jensen1976 - Theory of the firm: managerial behavior,...

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