ECOS3003 Lecture Notes - Lecture 2: Optimal Control, Discounting, Deadweight Loss
30 Jul 2018
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Firm: a focal point for a set of contracts. Creation of the legal system (considered as an individual so can write contracts): always one of the parties to each of the many implicit and explicit contracts that constitute a firm. Each individual will attempt to maximise own utility: owners: maximise profits (residual claimants), others: different objectives, e. g. maximise wages. Owner-manager conflict: owners often delegate to managers. Conflicts about: choice of effort; taking perks, differential risk exposure (managers may be risk-averse), different horizons (managers have limited tenure), over-investment (empire-building), other incentive problems (other contractors; employees free-riding, perks). Controlling incentive problems with contracts: manager () gets (cid:1847)=(cid:4666),(cid:4667) where = money compensation; = perks, minimum salary needed with no perks is . If owners have precise knowledge of profit potential of firm: (if gets =(cid:882), =). Realised profit = difference between potential profits and excess perks = : owners can solve potential incentive problem: offer = ( )
