Agency Problem and Its Solutions

Principal-substitute connection occurs when a first curtails an substitute. The first employs the substitute to effect a labor for him or to act on his side. For sample, in a extensive fortification, divideholders would employ superintendents to acceleration them to dispose the gang in dairy duty. However, influence problems may inaugurate consequently of the combat cause and asymmetry notice among firsts and substitutes, which guide to influence consumes. In this essay, I would approve to use the influence hypothesis introduced by Jensen and Meckling (1976) to decomposition that to what space that influence consume would detriment divideholder’s influence maximisation and what actions divideholders could grasp to amend it. Influence problems and main causes of it. First of all, there capability to combats of cause or divergent goals among firsts and substitutes, the substitute would act as their best self-cause but not first’s. Secondly, there is asymmetry notice among firsts and substitutes, superintendents may enjoy over notice than firsts or they could disguise their actions. Thirdly, there is misgiving in the issue. The issue may not reasonable depend on superintendents’ attack but too other factors approve amiable consummation or excellent market’s expectancy guide to extension in divide appraisement. Agency consumes Agency consume incurred when the superintendents do not attack to maximise firm’s compute and the consume to adviser superintendent and overbear their behaviours. Influence consume is the sum of three types of consumes, consume of maneuvering the curtail, consume of enforcing the curtail (monitoring and bonding) and residual detriment if curtail is not optimal. Solutions of influence problems Monitoring Management compensation Incentive compensation There are two important first substitute standard, irbearing preference and probable peril. Irbearing preference occurs when one of the parties, usually the agent, has amend bearing notice previous to the curtail. This unrecognized notice get be used opportunistically to optimize the service gained from entering the curtail. In probable peril the first is incompetent to perceive-keep the substitutes actions succeeding signing the curtail. This causes the substitute not to grasp the liberal consequences of his actions and thus he can use this unrecognized notice to act opportunistically and maximize his own emolument. In most cases the first get enjoy to raise the consumes of this behaviour.