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Unformatted text preview: for $1, so each person’s
income will be $200 a day, double the
amount they were earning individually. 07 (154-185) EMC Chap 07 11/17/05 5:13 PM Page 159 Shirking
Things go smoothly for a while. Each day
the 10 fishers work together catching fish,
and each day they catch 2,000 fish. Then
one day one of the 10 individuals, Jake, feels
lazy. He comes to work late, takes long
breaks, and generally doesn’t work as hard as
he should. We say he is shirking, or putting
forth less than the agreed-to effort. Because
of Jake’s shirking, the fish catch falls to 1,800.
Divided 10 ways, each person receives 180
fish, or an income of $180, that day.
Notice that one person, Jake, shirked, but
all 10 people had to pay for his shirking.
Everyone’s income fell by $20 because Jake
shirked. When he shirked, Jake received the
full benefits of shirking (longer breaks, less
work), but he paid only one-tenth of the costs
of shirking. Nine-tenths of the shirking costs
were paid by the remaining nine persons in
the fishing firm, none of whom shirked.
How do you think you would have
responded if you were one of the other nine
fishers and Jake continued to shirk? Do you
think you might have begun shirking? When
a person receives the full benefits of his shirking but pays only a fraction of the costs,
shirking is likely to increase. No doubt there
will be more people shirking than only Jake,
and this shirking will further reduce the fish
catch. In other words, instead of 1,800 fish a
day, the catch will fall to 1,600 as more people shirk, then to 1,400 as even more people
shirk, and so on. The increased fish catch
(2,000 instead of 1,000), however, was the
reason the 10 individuals came together to
form a team in the first place. Without added
fish, the reason for the firm to exist is gone. Monitors
How can the 10 members stop the shirking and continue to enjoy the benefits of the
added fish catch? One way is to choose one
among them to be the monitor—the person
in the firm who coordinates team production and seeks to reduce shirking (the boss,
in other words). To be effective, this boss
must have the ability to fire and hire people.
(Can you see the reason for having a boss
now?) If Jake is shirking, the boss must be
able to fire him and replace him with some- one who will not shirk. The threat of dismissal is what reduces shirking in a firm.
How can the monitor, or boss, be kept
from shirking? One possibility is to give the
monitor an incentive not to shirk by making
him or her a residual claimant of the firm. A
residual claimant receives the excess of revenues over costs (profits) as income. If the
monitor shirks, then profits are likely to be
lower (or even negative); therefore, the
monitor will receive less income. Few businesses
can operate successfully without a boss
or bosses. Can you
explain why? QUESTION: You say, “Once a firm is formed, people in the firm will shirk.”
You say it as though you know it will
happen. How can you be so sure?
ANSWER: We can’t say that “everybo...
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This document was uploaded on 01/16/2014.
- Winter '14