Managerial Economics: Today’s Agenda
Download
1 / 18

incentive conflicts and contracts - PowerPoint PPT Presentation


  • 508 Views
  • Updated On :

Managerial Economics: Today’s Agenda. Chapters 10 and 18 (p. 503-513) Incentive Conflicts and Contracts eBay Case, P. 275 Schmidt Brewing Company Sarbanes-Oxley Review Assignment 3. Managing with Economics. “traditional managerial economics”

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'incentive conflicts and contracts' - johana


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Slide1 l.jpg

Managerial Economics: Today’s Agenda

Chapters 10 and 18 (p. 503-513)

  • Incentive Conflicts and Contracts

  • eBay Case, P. 275

  • Schmidt Brewing Company

  • Sarbanes-Oxley

  • Review Assignment 3


  • Managing with economics l.jpg
    Managing with Economics

    • “traditional managerial economics”

      • Firm is a single profit maximizing decision maker

  • “new managerial economics”

    • Firm is a focal point for a set of implicit & explicit contracts between many decision makers

    • Highlights the role of decentralized information


  • Managing with economics3 l.jpg
    Managing with Economics

    • Full information management decisions

      • Maximizing profits

        • Perfect Knowledge of Demand

        • Perfect Knowledge of Costs

        • Marginal thinking

      • Cost minimization

        • Perfect knowledge of relationship between inputs and output

    • Managing in a world of imperfect, asymmetric information

      • Making the best use of decentralized information

      • Decision rights

      • Incentives and evaluation


    Slide4 l.jpg
    Firm as focal point for set of contractsContract is an agreement about obligations in a relationship


    The role of contracts l.jpg
    The role of contracts

    • Costless contracting

      • ideal contracts would align interests (minimize incentive conflicts) at no or low cost

    • Costly contracting and asymmetric information

      • contracts costly to negotiate, write, administer

      • parties to contract have asymmetric information on performance levels


    The story of the chinese junks l.jpg
    The Story of the Chinese Junks

    (attributed to Steve Cheung)

    A refined British lady is taking a boat ride in China. A mean-looking man is yelling at the rowers and whips them when they fail to work hard. The lady comments to her guide that the British would not allow this cruel treatment of workers. Indeed, the owner of the boat would be put in jail for violating labor laws. The guide is amused by her statement and indicates that the people rowing the boat are the owners. The mean-looking man is an employee.

    Explain what is going on!


    Precontractual information problems l.jpg
    Precontractual information problems

    • Bargaining failures

      • asymmetric information

        • See recent the bus strike and NHL lockout

    • Adverse selection

      • use of private information in manner detrimental to trading partner

        • Insurance markets

        • Valuable insurance markets fail to exist

          • No grade insurance


    Postcontractual information problems l.jpg
    Postcontractual information problems

    • Agency problems

      • principal contracts with agent for service

      • agent has postcontractual incentive to serve own perceived best interests

    • Asymmetric information complicates resolution of agency problems

      • principal incurs monitoring costs and/or

      • agent incurs bonding costs

    • Total agency costs

      = monitoring/bonding cost + any residual cost due to agency problem

    • Incentives to economize on agency costs

      • sharing increased gains from trade


    Ebay p 275 l.jpg
    eBay, p. 275

    • How does eBay create value?

    • What potential contracting problems exist on eBay?

    • How does eBay address these problems?

    • What are the contracting costs at eBay?

    • eBay claims that it has only a small problem with fraud and misuse of the system.

      • Does this imply that it is overinvesting in addressing potential contracting

      • problems? Underinvesting? Explain.


    Optimal combination of compensation and perks l.jpg
    Optimal combination of compensation and perks

    CEO utility function, C is compensation, P is perquisites: U=f(C,P)

    Owners have precise knowledge of profit potential: p

    Realized profits are: R=p-P

    Therefore offer CEO compensation contract:

    C=S-(p-R)



    Value maximization principle l.jpg
    Value Maximization Principle

    Incentive problems generate costs that reduce value. It is in the interests of all parties to a contract to develop efficient solutions to agency problems. More value is created (gains to trade), which can be shared among the contracting parties.

    How does this apply to corporate governance?


    Discussion questions l.jpg
    Discussion Questions

    • Describe an agency conflict in one of your organizations.

    • What do you think is causing this conflict?

    • What suggestions do you have for better controlling this conflict?


    Schmidt brewing company l.jpg
    Schmidt Brewing Company

    Schmidt Brewing Company is family-owned and -operated. The family wants to raise some capital by selling 30 percent of the common stock to outside shareholders. The company has been profitable and the family indicates that it expects to pay high dividends to shareholders. The family will maintain 70 percent ownership of the common stock and continue to manage the firm. The rights of shareholders are specified in the company's corporate charter. The charter specifies such items as voting rights (procedures and items subject to a vote), meeting requirements, board size, rights to cash flows, and so on. Once adopted, a charter can only be changed by a vote of the shareholders.

    What types of provisions in the corporate charter of Schmidt Brewing might motivate minority shareholders to pay higher prices for the stock? Explain.


    Sarbanes oxley l.jpg
    Sarbanes-Oxley

    • What potential effects will the Sarbanes-Oxley Act of 2002 have on the legal form of organization?

    • What potential effects will the Sarbanes-Oxley Act of 2002 have on the willingness of individuals to serve of corporate boards?

    • What potential effects will the Sarbanes-Oxley Act of 2002 have the level of executive pay?



    Slide17 l.jpg

    Looking Forward

    • Next Class: Managerial Economics and Organizational Architecture

      • Organizational Architecture, Ch. 11

      • Kodak case from Chapter 11

      • Ethics, Ch 21

        Coursepack: Nordstrom

        Giving Until it Hurts, WSJ

        Recycling Corporate Responsibility, WSJ


    Midterm evaluations l.jpg
    Midterm Evaluations

    • Please fill out

    • Goes directly to instructor

    • Feedback on what works; what could be improved – can allow adjustment of 2nd half of course

    • Thank you


    ad