ECON-2096EL Chapter Notes - Chapter 5: Opportunism, Human Capital, Joseph Stiglitz
26 Mar 2017
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The competitive model has some rough plausibility in a market populated by small firms. In the us (and many other capitalist economies) there is a tendency to idealize the family farm, the owner-operated shop, and the small independent craftsperson. In terms of the principal-agent relation, all these cases are characterized by the units of principal and agent (the people are self-employed no agency costs) Here the assumption that the principal and agent have the same knowledge and incentives is obviously true. For larger firms, the assumption that the principals (far-flung shareholders) are able to enforce their incentives on the agents (managers and workers in the firm) and monitor the behaviour of the agents is unrealistic. Information and incentive issues in large firms (corporations) Let us consider some of the informational and incentive problems inherent in the employment relation and in other agency relationships.
