Economics 1021A/B Study Guide - Quiz Guide: Management, Human Capital, Vertical Integration

• School: Western University
• Department: Economics
• Course: Economics 1021A/B
• Professor: bruce hammond

Document Summary

If contracts delegate decision rights and control of assets between firms, then governance arrangements delegate decision rights and the control of assets within firms. An analogy with contracts suggests a useful way to think about governance. When individuals within a firm disagree, they rely on the guidance and authority of the central office to sort things out same as managers of two firms would rely on a contract. The central office must be aware that employees, like independent firms, are tempted to act in their own selfish interests. However, the success of integration depends on the central office"s ability to reward and punish workers in ways that contracts cannot. Following duties can be derived from this concept: the central office should be sensitive to those aspects of production that are most likely to break down because of selfishness and contractual incompleteness. It should reward workers who sacrifice to assure coordination of design attributes.