AFF 604 Chapter Notes - Chapter 7: Homo Economicus, Human Capital, Classic Case
31 May 2017
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Document Summary
Agency theory: methodological approach that involves the application of game theory to the analysis of a particular class of social interactions. Supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving problems that can exist in agency relationships due to unaligned goals or different aversion levels to risk. The most common agency relationship in finance occurs between shareholders (principal) and company executives (agents). Agent: anyone trying to influence the actions of the other. Corporations analyzed as a set of agency relations. Bridges the gap between the utility-maximization hypothesis and the profit-maximization assumptions. Business ethicists complain that agency theorists assume that rational individuals are self- interested, or that they act from egoistic and not altruistic motives. Response from agency theorists: economic model of rationality does not privilege self-interest or egoism. Utility is defined with respect to the preference of individuals, and preferences reflect whatever desire individuals happen to have, whether egoistic or altruistic.
