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Published byDaniela Ross Modified over 9 years ago
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Managerial Economics & Business Strategy Chapter 6 The Organization of the Firm
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Putting forth best effort How do you compensate so workers and managers put forth greatest effort? Keep in mind there are different ways to compensate workers: n hourly n Straight salary n Piece-rate n Commission n Stock options, etc.
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The Principal-Agent Problem Occurs when the principal cannot observe the effort of the agent n Example: Shareholders (principal) cannot observe the effort of the manager (agent) n Example: Manager (principal) cannot observe the effort of workers (agents) The Problem: Principal cannot determine whether a bad outcome was the result of the agent’s low effort or due to bad luck
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Solving the Problem Between Owners and Managers Internal incentives n Incentive contracts n Stock options, year-end bonuses External incentives n Personal reputation n Potential for takeover
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Solving the Problem Between Managers and Workers Profit sharing Revenue sharing Piece rates Time clocks and spot checks
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