MARKET 1 Lecture Notes - Lecture 25: Information Asymmetry, Transaction Cost, Rational Agent
Document Summary
Two actors whose a (informal) contract/ market relation between them: a principle, an agent. Two conditions of agency theory (agency theory problem arises because of: conflict of interests, information asymmetry. Opportunistic behavior (assumption: all actors act opportunistically whenever possible. Hybrids" -> relational contracting: optimal governance structure", optimal size of the organization? (=when to internalize/ externalize the transaction?) Answer: there are costs in using the price mechanism. Three forms of transaction costs linked to the use of the price- mechanism. 4- free, perfect and symmetric information -> (in)complete contracts. Firms are holistic entities embedded between markets. Pareto optimal: no actor can be better off without another actor being worse off its nature, cannot be predetermined and remain. The relation between all participants in and outside the firm is based on a contract. Every relation within a firm should be based on contracts and tools to limit the conflict of interests and information asymmetry problems.
