PHL295H1 Lecture 5: Week 5: Shareholder Primacy
Document Summary
Class 4: theories of the firm theory of transaction costs. Behavioral assumptions: 1) human agents are subject to bounded rationality. Limited intelligence / information we make imperfect contracts: 2) at least some agents are given to opportunism. Use imperfect contracts to serve their own interests. Create costs that will effect everyone: firms will reduce the costs that occur in situation of imperfect contracts. What raw material they need, how many employees (skills needed) Different organization (ownership structure) = diff. transaction costs: owners share 2 formal rights: Right to appropriate firm of assets residual earnings. Depends on the costs owners are willing to pay: different ownership = different contract costs & different ownership costs. Natural selection: ownership form that reduces transaction costs will dominate in the end. General idea: the ethical responsibility of corporations is to serve the interests of their shareholders (or owners more generally) How to argue for shareholder primacy? (large firms)
