Thursday

 Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 7 Topics for Further Study
Chapter 22 of 36 Frontiers of Microeconomics
Section 5 of 19
…
The three topics of this chapter
1- the economics of asymmetric information
2- political economy
3- behavioral economics
…
1- The economics of asymmetric information, continued
A large corporation must deal with issues that do not arise in a small privately-owned business.
From a legal standpoint
· a corporation is an organization
· that is granted a charter recognizing it as a separate legal entity
· with its own rights and responsibilities
· distinct and separate from those of its owners and employees
From an economic standpoint the most important feature of the corporate form of organization is the separation of ownership and control.
One group of people, the shareholders, own the corporation and share in its risks and profits.
Another group of people, the managers, are employed by the corporation to make decisions about how to best use the corporation's resources.
…
In a corporation the ownership/control separation creates a principal/agent problem.
The shareholders are the principals, and the managers are the agents.
The chief executive officer and other top managers who are in the best position to know the available business opportunities are charged with the task of maximizing profits for the shareholders.
But ensuring they carry out this task is not easy.
The managers may have incentives and goals of their own, including
· having a plush office and a private jet
· having lavish parties and meetings at resorts
· growing the corporation size for the ego-fulfillment of presiding over a large business empire
So, the managers' own goals can distract their focus away from the corporation’s goal of profit maximization.
…
The corporation's board of directors is responsible for hiring and firing managers, monitoring their performance, and setting their compensation packages.
The top managers’ compensation packages often include incentives aimed at aligning the interest of shareholders with the interest of management.
Managers might be given bonuses based on performance and options to buy the company's stock at current price when later it is at a higher price.
…
The corporation directors themselves are agents of the shareholders.
The existence of a board overseeing management shifts the principal-agent problem from the managers to the board.
The issue then becomes how to ensure the board of directors fulfills its own obligation of acting in the best interest of the shareholders.
If the directors become too friendly with management, they may not provide adequate oversight.
…
Corporation principal/agent problems were big news in the early~mid 2000s.
The top managers of several prominent corporations, including Enron, Tyco, and WorldCom were found to be engaging in activities that enriched themselves at the expense of their shareholders.
Many of the managers were convicted of crimes and sent to prison.
Shareholders can sue directors for failing to sufficiently monitor management, but board members rarely go to jail.
… …
they rarely go to jail
karera wa mettani keimusho ni hairanai
彼らはめったに刑務所に入らない

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