AGENCY ECONOMICS AND INTERNATIONAL COMPARISONS OF CORPORATE GOVERNANCE SYSTEMS. Organisational Economics. There are two major branches of OE :. Agency theory regards the firm as a series of contractual relationships between owners and workers.
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INTERNATIONAL COMPARISONS OF CORPORATE GOVERNANCE SYSTEMS
Thereare two major branches of OE:
2- Transaction Cost Economics
How to maximize efficiency of transactions by determining the proper boundaries of the Org.
What should be done internally versuswhat should be contracted for on the outside?
Transaction Cost as Problem to Remedy
Organisational economists use the term “cost” to refer to a wide range of problems that owners must remedy in order to create an organization that allows for wealth maximization
Types of Transaction Costs
Owners and managers unable to process all of the available information, and face uncertainty in transactions or contract relationships
Employees, suppliers, and contractors may be in a position to take advantage of the owner
Principals and agents often have different goals and will seek their own self-interest
Agents will not always fulfill their obligations because they prefer leisure to work and are subject to shirking
Adverse selection: agents will misrepresent themselves
3- Information Asymmetry
Information related to exchanges or transactions is not evenly distributed
Agents have certain information about their own behaviour and shortcomings that is not available to the principal
4- Asset Specificity
Assets that are very specific and fixed can reduce the flexibility
5- Small Numbers
An organisation with only a small number of potential trading partners (an oligopoly) has a problem