A firm is a focal point for a set of contracts. Explain the problems that (1) agency relationships, (2) asymmetric information, and (3) adverse selection can introduce to building a successful contract between two people.
What will be an ideal response?
Agency relationships can be exploited when agents are not perfectly monitored. Generally a corporate manager has better information than the owners of the corporation about both the efforts of management and the true status of the firm. Berle and Means (1932) hypothesized that asymmetric information and agency problems would lead the managers of large corporations to seek their own self-interest and cause the collapse of large public corporations. Shareholders would be unable to effectively use contracts to control corporate management because shareholders will lack the post contractual information needed to evaluate the performance of management, according to Berle and Means. Adverse selection is the tendency of individuals with private information about something that affects a potential trading partner's costs or benefits to extend offers that would be detrimental to the trading partner. Individuals may be less willing or even unwilling to trade with individuals who might have more information. For example, owners of "lemon" automobiles know more about the quality of their car than potential buyers. The fear of buying a "lemon" used car greatly reduces the number of used cars sold.
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A) cigarettes B) beef hamburgers C) luxury cars D) concert t-shirts
The free-rider problem is
A) the use of private goods in one state by residents of another state. B) the incentive that people have to avoid paying for a public good. C) the incentive that people have once they are receiving welfare to keep getting welfare. D) that people cannot be forced to accept public goods.
If payroll taxes are increased, there will be a
A. Rightward shift of the labor supply curve. B. Leftward shift of the labor supply curve. C. Movement up the labor supply curve to the right. D. Movement down the labor supply curve to the left.
Allocative efficiency involves determining:
A. which output mix will result in the most rapid rate of economic growth. B. which production possibilities curve reflects the lowest opportunity costs. C. the mix of output that will maximize society's satisfaction. D. the optimal rate of technological progress.