By Günter Bamberg, Klaus Spremann (auth.), Prof. Dr. Günter Bamberg, Prof. Dr. Klaus Spremann (eds.)
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Extra info for Agency Theory, Information, and Incentives
As owners (or principals) of the firm, stockholders delegate decision-making authori ty to managers. responsibility Managers are the stockholders' agents and their is to run the company in the stockholders' best interest. However, due to imperfect observability, managers have the opportunity to pursue their own goals, which are in conflict with the goals of stockholders. It is important to note that imperfect observability of managers' actions is the basic source of the moral hazard problem. Even the observable end-of-period cash flow (or wealth) of the corporation does not give a clue about the agent's true contribution.
In other words, the principal is assumed to be unable to observe the agent's effort decision x E X. One implication of the exogenous risk 8 is that it gives a reason for the assumed information asymmetry. If the principal is not completely ignorant, she will usually know the production function f (how her gross wealth is affected by her agent's effort and the exogenous risk), and she will know the probability distribution of 8 . Later she will also observe the realization y of her gross wealth y.
If that variance becomes larger E and larger, ceteris paribus, t* is chosen smaller, and the share s* selected increases and tends to the value (19). z Another result of (36) concerns ~he question whether a wage should be paid for labor input (time of presence) or for labor output (result of work). Consider again a varying exactness of the monitoring signal as measured by the variance 0 2 . As 0 2 becomes smaller, 2 E E the share s* decreases. If 0E tends to zero, which means that the effort (labour input) can almost accurately be observed, the optimal share vanishes, s* = O.
Agency Theory, Information, and Incentives by Günter Bamberg, Klaus Spremann (auth.), Prof. Dr. Günter Bamberg, Prof. Dr. Klaus Spremann (eds.)