MARKET 1 Lecture Notes - Lecture 18: Legal Fiction, Agency Cost, Rational Expectations
Document Summary
Theory of the firm: managerial behavior, agency costs and. Main focus of the paper: the analysis of agency costs generated by the contractual arrangements between the owners and top management of the corporation. Theory of the firm is usually meant as theory of markets, where the firm is considered one of the main actors. Firm as a black box , operated to meet the relevant marginal conditions with respect to inputs and outputs, thereby maximizing profits- or present value. > unable to explain managerial behavior and overcoming of internal conflicts. Specification of individual rights determines how costs and rewards will be allocated among the participants in any organization. Specification of rights effected through contracting -> individual behavior in organization will depend upon the nature of these contracts. Agency relationship= a contract under which one or more persons (principal) engage another person (agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent.
