Transcript principal–agent problem

Naked Economics
Undressing the Dismal Science
Who feeds Paris?
What is GDP?
• Why is it a good measure?
• Why is it NOT a good measure?
What is price discrimination?
• Airplane ticket prices
Do incentives matter?
What is the “superstar phenomenon”?
What is creative destruction?
• Who loses out most often?
Do brands matter?
How can black rhinos be saved?
What is human capital?
What are the two basic assumptions that
economists make about individuals and firms?
1. Self-interested
2. Rational
Role of prices in the market economy?
• determining an efficient distribution of
resources in a market system.
• signal for shortages and surpluses which help
firms respond to changing market conditions
Advantage of market economy?
• Allocative efficiency
• The best available model
• BUT . . . (market failures)
Adverse selection
• When you do business with people you would
be better off avoiding. Adverse selection can
be a problem when there is asymmetric
information between the seller of insurance
and the buyer
• “What you don’t know CAN hurt you”?
Informational asymmetry
• transactions where one party has more or
better information than the other.
• E.g. – buying a used car, life insurance
(adverse selection)
Perverse incentives
• an unintended and undesirable result which is
contrary to the interests of the incentive
makers
• E.g. car seats on airplanes
Principal-Agent problem
• principal–agent problem or agency dilemma
concerns the difficulties in motivating one
party (the "agent"), to act on behalf of
another (the "principal").
• E.g. corporate management (agent) and
shareholders (principal), fast food employees
prisoner's dilemma
• example of a game that shows why two
individuals might not cooperate, even if it
appears that it is in their best interest to do so
• Ac, Bc – 1 year, 1 year
• Ac, Bs – 0 , 2 years
• As, Bc – 2 years, 0
• As, Bs – 3 months, 3 months
What is an externality?
• is a cost or benefit that is not transmitted
through prices, and is incurred by a party who
was not involved in the transaction.
• negative externality – pollution from a factory
• positive externality – fire department
What is a public good?
Role of Government
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Stability
legal framework
Protection of property rights
Protection of contracts
What is a public good?
• Examples
What is productivity?
Why are many poor countries poor?
Are foreign sweat shops bad?
What is the primary role of the Federal
Reserve?