Economics_Ch07

# 07 154 185 emc chap 07 111705 513 pm page 159

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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.

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