05_Overheads - Objectives for today Recap Why do we have firms Considerations in the allocation of decision rights One of the legs of the

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ACC 333 (Farrell), Fall 2011, Class 05 1 ACC 333 (Far el ) Fal 2011, Class 05 1 Objectives for today Recap – Why do we have firms? Considerations in the allocation of decision rights – One of the legs of the three-legged stool (Zimmerman) – The first “rule of the game” (Jensen and Meckling) How allocation varies within and across firms In-class activity ACC 333 (Far el ) Fal 2011, Class 05 2 From last time: Knowledge, rights and incentives in firms So to enjoy economies of scale and scope and lower transactions costs, firms must figure out how to do what markets do automatically In other words, principals must: – Build their own three-legged stool (Zimmerman) – Establish their own rules of the game (Jensen & Meckling) ACC 333 (Far el ) Fal 2011, Class 05 3 Rules of the game / Three-legged stool What are the rules/legs? Allocate decision rights to agents with specific knowledge of how best to use resources but this creates agency problems Create a performance measurement and control system and tie it to agents’ rewards and punishments but this has agency costs
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ACC 333 (Farrell), Fall 2011, Class 05 2 ACC 333 (Far el ) Fal 2011, Class 05 4 Rule 1: Allocating decision rights Also known as the centralization versus decentralization choice How do principals make this choice? – Considerations are summarized in Figure 1 of Jensen and Meckling’s “Specific and General Knowledge….” ACC 333 (Far el ) Fal 2011, Class 05 5 Rule 1: Allocating decision rights Jensen and Meckling, Figure 1 ACC 333 (Far el ) Fal 2011, Class 05 6 Figure 1 - What are the axes? Net Costs Location of Decision Rights
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ACC 333 (Farrell), Fall 2011, Class 05 3 ACC 333 (Far el ) Fal 2011, Class 05 7 Figure 1 – Endpoints of horizontal axis Net Costs CEO Individual
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This note was uploaded on 03/19/2012 for the course ACCACC 333 taught by Professor Anne during the Fall '11 term at Miami University.

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05_Overheads - Objectives for today Recap Why do we have firms Considerations in the allocation of decision rights One of the legs of the

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