Agency or principal-agent problem arises because:
Different interest and principal-agent
Unequal or asymmetric information
Principal-agent problem occurs in a number of different business relationships, but is a common problem in large joint-stock companies, because of the separation of ownership from control. Owner-managers to engage shareholders in their name make decisions and manage the company. The owners-shareholders are the principals and managers are agents. Managers are better informed about the company and its shareholders of prosperity. When one side is better informed about the activities of the other party, then the parties are asymmetrically informed.
The opposite interests and asymmetric information allows managers to more difficult goals that are not in the interest of the owner. Therefore, profit may be lower than the one favored by the owners, the cost may be higher, and the value of the company is lower than the …show more content…
The managers of joint stock companies are not the owners and they have goals that differ from the maximum profit. They seek personal goals, which are different from the objectives of the shareholders. Managers can not pay attention to personal goals, until the owners realize the desired level of profit. One of the biggest limitations of maximizing profit is the uncertainty and complexity of the environment. Uncertainty prevents the company to maximize profit, even if they want to. It is difficult to assess which of the possible courses of action leads to the maximization of profits. The managers do not know is not all alternatives of action or possible outcomes. Businesses deviate from maximizing profits to discourage the entry of new companies into the market. Companies form prices, not on the basis of the maximum but on the basis of the target profit, tj.na level that is slightly above the cost of
Different interest and principal-agent
Unequal or asymmetric information
Principal-agent problem occurs in a number of different business relationships, but is a common problem in large joint-stock companies, because of the separation of ownership from control. Owner-managers to engage shareholders in their name make decisions and manage the company. The owners-shareholders are the principals and managers are agents. Managers are better informed about the company and its shareholders of prosperity. When one side is better informed about the activities of the other party, then the parties are asymmetrically informed.
The opposite interests and asymmetric information allows managers to more difficult goals that are not in the interest of the owner. Therefore, profit may be lower than the one favored by the owners, the cost may be higher, and the value of the company is lower than the …show more content…
The managers of joint stock companies are not the owners and they have goals that differ from the maximum profit. They seek personal goals, which are different from the objectives of the shareholders. Managers can not pay attention to personal goals, until the owners realize the desired level of profit. One of the biggest limitations of maximizing profit is the uncertainty and complexity of the environment. Uncertainty prevents the company to maximize profit, even if they want to. It is difficult to assess which of the possible courses of action leads to the maximization of profits. The managers do not know is not all alternatives of action or possible outcomes. Businesses deviate from maximizing profits to discourage the entry of new companies into the market. Companies form prices, not on the basis of the maximum but on the basis of the target profit, tj.na level that is slightly above the cost of