Essay On Agency Theory

Essay On Agency Theory
Agency theory is a widely known term in the field of businesses. This theory has to do with a
problem that occurs in certain fields of a company and as a result, it affects the function and the
performance of the firm. In this paper, we will discuss about the agency theory and the methods
which will help us to deal with this problem.
Agency theory concerns the conflicts between people in the same company. Agency relationship is
defined as a contract under which one or more persons (the principals) engage another person (the
agent) to perform some service on their behalf which involves delegating some decision making
authority to the agent (Jensen and Mackling, 1976). This theory explains the relationship between
principals, such as between ... Show more content on Helpwriting.net ...
In order to achieve this goal we use three mechanisms.
The first mechanism is the board of directors and the number of them is related with the
effectiveness of the board. On one hand, Yermack (1996) is evaluating a proposal for limiting the
size of the board of directors in order to improve their effectiveness. On the other hand, Dalton et al
(1999) mention that a larger board provides better environmental links and more expertise. This
means that a larger board will have members from many departments of the company or people
outside the company. In this way, different opinions will be heard which may help the company to
function
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The Role of Conservatism in Financial Reporting
The Role of Conservatism in Financial Reporting
Table of Contents
Introduction 3 Applications of Conservatism in Accounting 4 Advantages associated with
Conservatism 7 Disadvantages associated with Conservatism 11 Recommendations and conclusions
14 References 17
Introduction
This report investigates the application of conservatism in accounting and its role in financial
reporting. We also examine and compare the advantages and disadvantages associated with
conservatism and provide our opinion about conservatism. Conservatism may be a controversial
accounting measurement principle but it has a long history and its use is far–reaching. Conservatism
by definition is that all probable losses or expenditures will be recognized as they ... Show more
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It is easy to recognize that information asymmetry exists in contracting due to the principal–agent
nature of the relationship between a lender and a borrower, as well as between shareholders and
managers of the firm. In both cases the agent has more information about the firm than does the
principal.
In accordance with the bonus plan hypothesis of positive accounting theory, managers will have a
tendency to overstate the net value of assets and debt–holders are aware this. Watts also mentions
that the agents have limited liability in contracts because the cost of their actions can be well over
their individual wealth; therefore the principal may never recover the losses incurred (Watts, 2002).
Conservatism allows the principals to use "lower bounds measures" to monitor the agents by
applying restrictions such as debt covenants and impede behaviour that could lower the value of net
assets or the loan, thus increasing the firm's risk (Watts, 2002). In contracting, conservatism is used
to offset some of the information asymmetry in an attempt to reduce agency costs and overall risk of
debt–holders. Contracts also tend to exclude non–verifiable assets such as intangibles, making the
net value of assets conservative.
Shareholder's litigation – Many academics identify shareholder litigation as another cause for the
continued use of conservatism in accounting. The reason is that litigation produces asymmetric
payoffs because "overstating

The Compensation Of Executive Marketing
Compensation of executive marketing is a complex and also controversial area under discussion.
Different types of business groups and their community has considered the interest of stakeholders'
by which they can able to attract the main attraction of all companies and their director's. CEO has
paid the overall view of different types of marketing models and their impact on market with the
help of principle agent models. Under this toning vision the payment is use to decrease the main
hazard problem which arises as because very little control firms in Australia. There are many
shareholders has designed the pay package randomly to increase the incentive of CEO's firm value.
The main review is suggested to the both executive control and the ... Show more content on
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Evolutions of annual compensation are coming from 1990 to 2007 in Australian market to present
the literature survey and their annual compensation for the highest three payment paid. The fast
development of Executive pay has received with the help of incensement of dramatic compensation
of economic market in Australia in between the 1995 and 1997 (Song, 2000). These annual growth
has grown in a dramatic way to fulfill the economic value in Australian market, which compares
them across the world. This annual rate has grown 10% with the help of all individual data analysis
and the stakeholder's compensation. It also implies the stock market and its values in 2004 by
contributing the popularity of stock options (Lazear & Oyer, 2004). He said about the shift attention
of stock value including their attention in the academic literature for further research process, which
is needed to determine the stakeholder's causes and penalty. The incensement of stock option
including CEO has paid the basic needs to account for the important changes of structural payment.
This stock option has risen from $0.6 to $1 million over the same period. The important components
of CEO have already received a surveying period and literature payments. This observation has been
coming by obtaining information of difference comprehensive which forms the payment structure of
stakeholders. Strong growth has occurred in the middle year in executive remuneration from 1990s
to 2007.
In economic terms

Moral Hazard in Banking Essays
Moral Hazard in Banking Moral hazard is an asymmetric information problem that occurs after a
transaction. In essence, a lender runs the risk that a borrower will engage in activities that are
undesirable from the lender's point of view, making it less likely that the loan will be paid back.
Gary H. Stern's article, "Managing Moral Hazard with Market Signals: How Regulation Should
Change with Banking", addresses the moral hazard problem inherent to the financial safety net
provided by the government protection of depositors. Interest rates do not reflect the risk associated
with bank activity, which in turn causes banks to finance higher–risk projects with price tags that are
not parallel to the risk level. A solution ... Show more content on Helpwriting.net ...
After the passage of the FDICIA, two trends have emerged that have further exacerbated efforts in
regulating moral hazards. The first trend is increased asset concentration among larger banks. Over
time, more assets have flowed into fewer banks, and as a result more TBTFs were incubated in the
process. The second trend to emerge is increased complexity of banks. Increase of bank sizes
involved not only structural growth but also geographic reach. Larger banks begin to offer a greater
scope of offerings. With this plethora of change amid increased sizing, new skills needed to be
developed in order to manage the new risk. The complexity and size of banks and their associated
offerings caused a greater level of asymmetry between regulators and bank managers.
Opponents of the safety net provided by the government have offered several alternate options, one
of which is little government intervention, if at all. Such Laissez Faire approach, according to Stern,
is that they do not credibly address the potential for instability in the banking system nor the TBTF
problem. The absence of a federal safety net creates the potential for bank panics which would have
a substantial cost to our economic system. Privatization will not eliminate the expectations in the
material market making risk harder to price. Under the suggested system,

Sox Market Failure
Jasso, Sean D. Ph.D. SARBANES–OXLEY – CONTEXT & THEORY: MARKET FAILURE,
INFORMATION ASSYMETRY& THE CASE FOR REGULATION, Journal of Academy of
Business and Economics, Volume 9 (3) 2009. ISSN: 1542–8710.
Central Theme
In the article "SOX– Context and Theory: Market Failure, Information Asymmetry & The case for
regulation ...volume 9(3), Professor Jasso argued that Sarbanes Oxley Act is a principle that be used
only for the "ethical and moral boardroom in the public corporation", however, it is intensely more
than that (Jasso, 1). In other words, Professor Jasso had many reasons to proof that the act itself had
made a positive impact to the financial and managerial accounting since the 'July 30, 2002' (Jasso,
1). He described how SOX had made ... Show more content on Helpwriting.net ...
These includes company frauds, failure in business, controlled the external and internal
responsibilities, and the risks of being unethical. Even though there are many reasons a company
need to apply this acts, it is their own responsibility to choose which one is better for their firm.
As Professor Jasso mentioned the Glass–Steagall case in which fulfilled the requirement of market
failure, it is important that investors understands how to make best decision before they ended up in
bankrupt (Jasso, 7). In this case, there is nothing perfect because the case of Steagall had proof how
policy needs to be improved from time to time. People will always make mistake and in order to be
right, they need to have a good policy. However, a good policy did not determine how well a person
will behave in their society.
By saying this, I reminded everyone to be an ethical individuals. Not only in their home, but also in
their companies. In the connection to this article, the best time to apply this knowledge is "right
now" because as Aristotle said in previous article "a good character will make a good society". In
other words, if a person know what SOX was and applied it in their life, they will be

Review the Video Whistleblower Fired for Exposing...
Whistleblower Fired for Exposing Truth/Corrupt Government Contractor
By Yolanda Holmes
Capella University
Abstract
Navy performed limited background checks on Thompson and Salvatore Carabetta when project
was granted. Shaw Group and Carabetta were feuding during project, company rejected warnings
from whistle–blower John Jack, costs escalated and components of houses were downgraded
without Navy approval. Navy couldn't get documentation out of American Eagle, Navy didn't act
quickly on information from John Jack.
Principal–agent theory. In this time of ever more scarce government resources, the idea that one
level of government can mandate the activities and therefore resource usage of another may seem
counter–intuitive. ... Show more content on Helpwriting.net ...
It became apparent very quickly that this was not an isolated example; that this was not an isolated
problem. Nalder found it in one job after another from Patrick Air Force base in Florida, to fort
Leonard Wood Army Base in Missouri. American Eagle's military home–building projects had
fallen behind schedule. In Jacksonville, Arkansas, home of Little Rock Air Force Base, local
Journalist John Hoffheimer reported that civilians were suffering from American Eagle's actions as
well. The first indication there were any problems, occurred when there were rumors that some
contractors were being paid late or perhaps not being paid at all. Most of these were small
companies, which was putting them in a financial bind. There was one sub–contractor filed for
bankruptcy. Dozens of other settle for small percentages of what they owed. However, there was one
that held out, Tommy Austin, Cement business. They were contracted to pour the foundations of
more that 200 homes for American Eagle. His lawyers are still trying to get all the money he says he
was promised. In the end, the Air Force actually bears some of the responsibility because they did
not have tight controls over this process Films Media Group. (2009, June 30).
The principal agent theory applies to this Whistleblower's Tale because the Navy, (we are going to
call them shareholders)

Asymmetric Information And Market Outcomes
BUS530 Managerial Economics
Module 4
CASE– Asymmetric Information and Market Outcomes
Trident University International
Dr. John Gaze
Antoinette Gibson
January 28, 2015
Car Market
The car market is at the forefront of many homes within the society today. At some point in
everyone's life they have to purchase a car or someone close to them makes that big purchase in
their life. Throughout this paper I am going to discuss a few things when we talk about car markets.
First I am going share whether or not I believe the car market has an asymmetrical information
problem. Then I will share what the markets response to adverse selection. Next, I will highlight the
car market's response to moral hazard. When we think as a "market signal", I will be considering
whether or not education can help companies make better economic decisions when asymmetric
information exist. Finally I would share what I believe the market response would be if there was
perfect information.
Market response to asymmetric information
In many markets, asymmetric information is a problem, such as the insurance markets, credit
markets and even the car markets. This is simply where one person in the exchange knows
significantly more than the other (Lillo 2013). I believe in the car market, there is definitely a
asymmetric information problem. I think it may be a more common issue when we talk about some
of the smaller car lots or used car lots. Often times individuals go to those lots thinking they are

George Akerlof's Paper Thesis
What comes to our minds when we think about the sellers of second hand or used goods? I think
most of us will say that they are untrusted, non–moral "sleazy", con men and disreputable. Perhaps
this assessment is unfair for all the second hand or used goods' sellers but I think the experience
proves that it is actually typical for most of them. At least the majority of people will say that. The
question now is why? Why is this the conviction of many of us? This is because the seller always
knows a lot of information about his goods more than the buyer knows. The seller knows a lot more
about his goods' quality and their potential problem while the buyer doesn't know a lot of this
information. This phenomena in the economic world is called asymmetric information. George A.
Akerlof, an economist and professor at the university of California wrote a research paper in 1970
titled by the market of lemons. Akerlof's paper is one of the most important contributions on
asymmetric information. in this simple research, I am going to discuss this thesis in the light of
Akerlof's paper. What is the actual problem? The main point in Akerlof's paper is that the
asymmetric information makes an adverse selection. This adverse ... Show more content on
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Whenever one party to an economic transaction has greater knowledge than the other party to the
same economic transaction, Asymmetric information or information failure is presented. For
example, in trading used cars, if the seller owned the car and of course he knows its quirks and
potential problems. On the other hand, the buyer doesn't know a lot of that information. this case is
Asymmetric information which is the main point in the market of lemons when is any potential
price will be attractive to the seller according to the information he knows about his

Pros And Cons Of Agency Theory
Agency theory is concerned with the agency relationships. The two parties have an agency
relationship when they cooperate and engage in association wherein one party the principal
delegates decisions and /or work to another an agent to act on its behalf (Tan & Lee, 2015). The
important assumptions underlying agency theory is that potential goal conflicts exists between
principals and agents; each party acts in its own self–interest; information asymmetry frequently
exists between principals and agents; agents are more risk averse than the principal; and efficiency
is the effectiveness criterion (Miller & Sardais, 2011; Kingston & Haijie, 2014). Two potential
problems stemming from this assumption may arise in agency relationships: an agency problem and
a risk sharing problem. An agency problem appears when agents' goal differs from the principals'
and it is difficult or expensive to verify whether agents have appropriately performed the delegated
work.
A risk –sharing problem arises when agents have different attitudes towards risk that cause
disagreements about actions to be taken ... Show more content on Helpwriting.net ...
This is achieved through improved public service delivery and more informed policy design. In
many countries, especially developing ones, the government fails to deliver key essential services to
its citizens due to problems such as: misallocation of resources, leakages or corruption, weak
incentives or a lack of articulated demand (William, 2002). Similarly, governments often formulate
policies in a discretionary and non–transparent manner that goes against the interests and actual
priorities of the poor, these problems are perpetuated because the three key groups of actors in the
public policy and service delivery chain–policy makers, service providers and citizens have different
(sometimes conflicting) goals and incentives, compounded by information asymmetries and lack of
communication (William,

Hemispheric Dominance
Hemispheric Dominance, or right brain/left brain as it is more commonly known, is a widely
discussed topic in psychology. Observations have been made in the field about how one side of the
brain is utilized more in certain situations than in others. It has been said that one hemisphere
dominates the other in every person, and said person has a better aptitude for subjects in their
respective brain. It is true that most people have a propensity for the themes that correlate with one
side or the other; but in reality, everyone uses both sides of their brain complementarily at various
times in their lives.
The right brain is said to control the left side of the body as well as being the creative and athletic
part of the brain. It is the more ... Show more content on Helpwriting.net ...
An experience from my life that exemplifies the distinction of the two hemispheres of the brain is
when I was four. We would visit my aunt and uncle's house and I would use their children's toys. I
was less interested in the Barbies and dolls that belonged to my female cousin than I was in the
Legos that belonged to her brother. He had several Lego models built and placed on shelves in his
room. He enjoyed putting them together and playing with them as the sets instructed. I was more
comfortable, taking the sets apart and sorting the pieces by size, shape, color, etc. This arranging
and organizing led me to realizing much later that I was less of a spatial/visual person and was more
organized and numerically inclined. Although, after I was done sorting and counting them, I would
build something that didn't have instructions; a car, a house, a giant man. Though I enjoyed the
sorting process, I also was very imaginative in the situations I would conjure up for the tiny Lego
men. Looking back, I can see that one hemisphere does not dominate the other, but I can have
characteristics from both sides of the brain.
Most people believe that a person is either right or left brained. This is untrue in that a person can be
more inclined to have more prodigious number skills, but not so much that it limits them to only
take a numerical approach. Everyone has traits from both sides of the brain, it just depends on how
they

Financial Intermediaries Exist Purely Because of...
Private equity is usually medium to long–term finance provided in return for an equity stake in
potential high growth unquoted companies. These equity investments include securities that are not
listed on a public exchange and are not easily accessible to most individuals [1]. There are usually
available only to high net worth individual 's, corporation 's, institutional clients etc. These
investments range from initial capital in start–up enterprises to leveraged buyouts of fully grown–up
corporations. Mostly Private Equity funds are structured as closed–end funds with a finite life span
of 10 or 12 years, which may be extended with the consent of the majority of the shareholders
(Gompers and Lerner, 1999). Although they are illiquid and ... Show more content on
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Some private equity funds that have made high–debt buyouts could crash too, and a number of
pending buyout deals may not go through. For eg at the end of July 2007, financing for the Alliance
Boots and Chrysler buyouts, two of the biggest private equity–backed deals in the markets, ran into
serious difficulties, intensifying fears about a looming credit crunch [5].
In recent months, all that has changed. Investors who previously snapped up private equity loans are
now being refused low interest rates and easy credit conditions [4]. The success of private equity
firms depends a lot on the availability of low cost debt. But in a situation like this it becomes more
difficult and more expensive for PE funds to borrow money to buy companies. If the economy
slows down, acquired companies ' cash flow will too, making it harder for PE funds to pay back
borrowed money. Volatile share markets will also make it more difficult for PE funds to re–sell
companies, especially as the potential buyers may themselves face tighter credit conditions. [5],
Globally private equity backed companies have shown to grow faster than other types of companies.
This has been made possible by the provision of a combination of capital and experienced personal
input from private equity executives, which sets it apart from other forms of

Ebay Case Study
EBay and the Existence of Firms
As a global online auction market, eBay provides people a new way to do online shopping, not only
by purchasing a product at a certain price, but also by the unique auction format. Through auction
procedure, sellers can earn more than the base price in their mind and buyers can bid the price up to
the most they can afford.
By setting up a convenient platform to gather sellers and buyers together, eBay reduces lots of
searching costs as other websites expend. However, there are still two major problems which can
lead to transaction costs for an unregulated online auction market: Adverse selection and moral
hazard. Adverse selection occurs when information asymmetries appear before both sides ... Show
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Another feature of eBay is that although they do several advertisements, consumers acquire this
website mainly through word of mouth. They have low advertising expenses and high brand
awareness mostly because consumers are satisﬁed with their experience on eBay and would like to
share with others. Because of the strong word–of–mouth effect, eBay has now expanded globally
and grows rapidly among foreign

Essay On Symmetry In The Eyes Of The Beholder
Symmetry in the Eyes of the Beholder
Physical appearance is held in high regard amongst the human species and observational methods
are used in the construction of impression formation. One particular method being, the preference
for biological symmetry. Biological symmetry is defined as similarity or balance between parts of
an organism so that if split in half mirror images are formed (Symmetry, Biological, 2016). The
visual detection of perfect biological symmetry, naturally, amongst humans is fairly complicated but
past research has demonstrated that it's not impossible. According to research conducted by Rhodes,
Proffitt, Grady, and Sumich (1998), humans have a sensitivity to different levels of symmetry. The
human preference for ... Show more content on Helpwriting.net ...
The perception of being friendly can be defined by the level at which one perceives another to be
socially capable of possessing various friendships, or the ability to be kind to others. The perception
of being friendly, also, has not been significantly linked to biological symmetry. However, research
has proposed that the perception of being seen as helpful, sympathetic, and forgiving is decreased in
asymmetrical faces (Noor and Evans, 2003). The perception of being intelligent can be defined by
the level at which one perceives another to possess intellectual abilities (i.e problem solving,
planning, learning). The perception of being intelligent has, in conjunction with the previous
variables, not possessed a major role in the majority of research that pertains to biological
symmetry. Nonetheless, one study found a correlation between body asymmetry and low IQ in
undergraduates (Furlow, Armijo–Prewitt, Gangestad, & Thornhill, 1997). Overall, research studies
pertaining to biological symmetry, as a whole, and impression formation have been ambiguous thus,
leaving current findings open to debate. Conversely, research studies pertaining to facial symmetry,
attractiveness, and mate selection have been modestly more definitive. Thereupon, leading to the
conclusion that facial symmetry may render more results in the construction of

Solution for the Asymmetry of Healthcare Information
The standard supply and demand model assumes that the market has perfect information, which
means that individuals have full knowledge about prices, quantities, and qualities of goods and
services, but this does not quite apply to the health care markets. There is imperfect information on
the demand side of healthcare, where patients lack full knowledge of things such as current health
condition, diagnosis and prognosis, treatment options, effectiveness of treatments and possible side
effects, as well as costs of treatments. Information in the health economy is not only imperfect, but
it is also asymmetric. While the demand side has imperfect information, the supply side is much
better informed. This means that levels of information differ between patients and physicians, which
is the basic problem of the question if doctors act in the best interest of the patients. Patients are
normally poorly informed compared to their doctors and therefore at a disadvantage. The market
solution to this information asymmetry is the agency relationship. The principal agent relationship
occurs when a principal has an agent perform duties that are in the best interest and preferences of
the principal. The patient, or principal, delegates his decision making authority to his doctor, or
agent, who will usually be the provider of the recommended services. Patients choose to delegate
their decision making to doctors because they recognize the information gap and realize that the best
course of

Switching Cost Arise From The Asymmetry Information...
1. Introduction In the bank–firm relationship, switching cost arise from the asymmetry information
between firms and banks, which gives the lock–in power for banks to gain extra rent from their
customers, thus weaken the substitutability of loans offered by different banks (Shy, 2002; Vesala,
2007). In addition to the administrative costs of changing a bank account in the loan market, there
are additional costs associated with information asymmetry that the current lender knows more
about the quality of the firm than a potential new lender. Hence, this confidentiality allows banks to
exploit their informational advantage over competitors and lock in their incumbent customers to
earn higher profits on repeated lending. Switching costs in banking represents a source of rent that
reduces the competiveness of the market. The reminder of this proposal is organized as follows: the
next section demonstrates the background and motivation of the research topic. Section 3 reviews
literature on switching costs and also provides some relevant studies on firms' choices of remaining
a single relationship or initiate multiple relationships. Section 4 discusses institutional background
and history of China's banking industry and its reforms. Some literature on China's banking market
and effects of reforms is also included in this section. The last section discuss about my future
studies. 2. Background and Motivation Since having long and close bank–firm relationships makes
firms more

The Light Of Signaling Hypothesis Of Dividend Policy And...
Information asymmetry plays an important role in corporate finance. Discuss in the light of
signaling hypothesis of dividend policy and debt financing
1. Introduction
Economic and other theories assume market information,. However empirical studies suggest that
the market is inefficient and the information is imperfect, because management may most times
have access to information that shareholders are not privy to, which leads to information asymmetry.
Thus, shareholders rely on dividends, dividend announcement and changes in dividend between
periods as a basis for company valuation, performance evaluation and to forecast future earnings.
An increase in dividends is often regarded as a positive signal, which causes share prices to
increase, and cause investors to buy more shares. On the other hand, a decrease in dividend will
cause a decrease in share price, as investors sell their shares.
2. Information asymmetry
Information asymmetry occurs where one party in transactions has more or better information than
the other. This creates an imbalance of power in transactions which may give result in the
transaction going bad, or even a market failure. For example, when buying or selling a car, the
owner is has full knowledge about its service history, accident history and likelihood to break down.
The potential buyer, by contrast, may buy the car not having all this information and have a broken
down car sooner than expected.
Information asymmetry causes two major problems

Examples Of The Principal-Agent Model
Intruduction This note considers the simplest possible organization: one boss (or "Principal") and
one worker (or "Agent"). One of the earliest applications of this Principal–Agent model was to
sharecropping, where the landowner was the Principal and the tenant farmer the Agent, but in this
course we will typically talk about more familiar organization structures. For example, we might
consider a firm's shareholders to be the Principal and the CEO to be the Agent. One can also enrich
the model to analyze a chain of command (i.e., a Principal, a Supervisor, and an Agent), or one
Principal and many Agents, or other steps towards a full–fledged organization tree. The central idea
behind the Principal–Agent model is that the Principal is too busy to do a given job and so hires the
Agent, but being too busy also means that the Principal cannot monitor the Agent perfectly. There
are a number of ways that the Principal might then try to motivate the Agent: this note analyzes
incentive contracts (similar to profit sharing or sharecropping); later notes discuss richer and more
realistic models. Taken literally and alone, the basic Principal–Agent model may seem too abstract
to be useful. But we begin with this model because it is an essential building block for many
discussions throughout the course–concerning not only ... Show more content on Helpwriting.net ...
In fact the problem can arise in almost any context where one party is being paid by another to do
something where the agent has a small or nonexistent share in the outcome, whether in formal
employmentor a negotiated deal such as paying for household jobs or car

Value Based Corporate Governance And The Impact Agency Theory
Value based corporate governance.
I would like to explore value based corporate governance and the impact agency theory has on it.
Agency theory looks at the conflict of interest between people with different interests in the same
assets. It is important to look at the aspects of agency theory as it is an important part of
organisation behaviour and is integral to corporate governance. Agency cost, the cost incurred by a
company due to agency conflict and agency theory is sometimes used as an independent aspect and
at times jointly with agency theory. For good corporate governance it is important to find a fine
balance between the shareholders and the management of a company.
Management might want to take the company in a direction that ... Show more content on
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To deal with these issues and to ensure smooth functioning of a company there exist three basic
departments in a company, the nomination department, the compensation department and the audit
department. These departments enable a company to function in an organised Mondal 2
manner, especially with regards to the people with interest in the capital generated by the company –
the shareholders; the executives entrusted with the task of generating profit and capital.
The nomination department exists to nominate the managers and the people of the board of
directors. The compensation department is in place to look at matters of executive compensation
pay. The audit department does the financial analysis, reviews and reports on the financial health of
a company.
Massive number of corporate scandals that began in late 2001 brought into review the functioning
of public company boards and brought under scrutiny the potential ﬂaws in their executive
compensation practices. Now a common consensus exists that a majority of boards have adapted
compensation arrangements that does not abode well with the views of shareholders. There still
exists a major disagreement about the scope and source of such problems and the ways and means
of tackling them.
The first scholars to state that a theory of agency be created, and to actually begin its creation, were
Stephen Ross and Barry Mitnick,

What Is the Principle-Agent Relationship? Using Examples...
A great majority of social and economic relationships are of the principle agent type.
The principle–agent problem is a game–theoretic situation where; there is a player (the principal)
and one more other players (the agents). This is the problem of how the principle can motivate the
agent to act for the principles benefit rather than follow self interest. "The problem is how to devise
incentives which lead to report truthfully to the principle on the facts they face and the actions they
take, and act for the principles benefit. Incentives include rewards such as bonuses or promotion for
success, and penalties such as demotion or dismissal for failure to act in the principles interest."
(Black, J. 2003). The actions however, may not ... Show more content on Helpwriting.net ...
Thus, information on product safety and health hazards is often publicly provided. (e.g the Food and
Drug Administration). Similarly the education system provides, in addition to its training role, an
informational function known as screening. That is by attaching levels of achievement to persons
coming out of the education system (e.g. degrees, diplomas, grades), information is being provided
to prospective employers regarding the potential productivity of the person. Presumably, the practice
of licensing various professions or trades plays a similar screening role, however imperfect it is. The
dissemination of information can, for our purposes, be considered as a particular type of public
good.
Due to the non existence of perfect contingency markets, Pareto optimality does not exist in the real
world, and this may influence government behaviour.
According to Brown & Jackson (1990), inefficiency in the public sector arises when there is an
asymmetry of information between those who demand services and those who supply them. This
problem is predominantly evident in education and healthcare due to imperfect information. For
instance, a patient (the principle) seeks information and advice from her GP or consultant (the
agent) concerning her medical condition (i.e. health status). The doctor has specialist technical
knowledge and subsequently in providing information to the patient the doctor

Types Of Financial Resources : Shareholders And Debt Holders
Nowadays, although 71% of firms are sole proprietorships, only 5% of revenue is derived from
them. In fact, 84% of revenues are derived from Corporations (Berk and DeMarzo, 2014; Figure
1.1). Corporations are firms owned by multiple owners called shareholders (Berk and DeMarzo,
2014) but run by managers who make decisions on their behalf. Therefore, a problem arises from
the separation between "ownership" and "control" (Jensen and Smith, 1985), the agency problem.
Firms have two types of financial resources: shareholders and debt holders, each type has a different
concern. While shareholders are wealth maximisation focused, debt holders are concerned with the
ability of the firm of paying them back – with an agreed–upon interest rate. As ... Show more
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Then we will discuss the possible consequences of these agency problems; and therefore whether
efficient solutions to these problems exist. To begin with, the agency problems exist because of the
separation of ownership and control (Berk and DeMarzo, 2014). This separation leads to serious
conflicts of interest: a player act based on its own interests at the expense of others ' (Jerzemowska,
2006). Jensen and Smith agree that there are two types of conflicts of interest: between shareholders
and managers on one hand and between debt holders and shareholders on the other hand. Why,
instead of align their interests to make the firm better off, each party try to act for its own interests?
First, we deal with the conflict of interest between managers and shareholders. As we said
previously the manager 's role is to increase shareholders ' wealth through his decisions. When a
good decision is aligned with shareholders ' interests, they are better off. Berk and DeMarzo (2014)
take as example Apple shares which are worth 60 times more than in 2001, thanks to the launch of
the first iPod. By means of the managers ' decision of Apple in 2001, shareholders increased their
wealth. Despite this willing to take good decisions for the shareholders ' interests, managers tend to
act differently. For instance, Wal–Mart Stores in 2010 gave million dollars to charity, which
decreased shares ' value. Despite this ethical decision, most shareholders did not feel that it was in

Theories Of Agency Theory
The agency theory explores risk sharing among individuals or groups. Risk sharing situation raises a
problem when co–operating parties have different attitudes towards risk. Agency theory broadens
the risk–sharing concept to include the agency problem which occurs when co–operating parties
have different goals and there is division of labour (Kathleen. 1989). According to an audit quality
forum (2005), an agency relationship arises when a principal (for example, an owner) engage
another person as their agent (or steward) to perform a service on their behalf. This leads to
delegation of some duties and responsibilities to the agent. Consequently, the principal has to place
some trust in the agent hoping that they will act in their best interests. ... Show more content on
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The consequence of these problems is that the principals may lack trust in their agents and they may
therefore need to put in place mechanisms, such as audit, to reinforce this trust. Agency theory is
concerned in solving these problems that arise in an agency relationship. A simple agency theory
model suggests that, as a result of information asymmetry and self–interest, principals lack reasons
to trust their agents and will seek to resolve these concerns by putting in place mechanisms to align
the interests of agents with the principals and to reduce the scope for information asymmetry and
opportunistic behaviour (Audit Quality Forum, 2005). According to Jensen and Meckling (1976),
agency theory attempts to describe the agency relationship in the form of a metaphorical contract.
That is, agency theory is a contract in which the principal is represented by management in
executing the strategic goals and objectives and the auditors in providing assurance in their

Facial Symmetry and Physical Attractiveness
Literature on the topic of attractiveness is very extensive. The human face is something that catches
every ones attention and more over the scientists as well the psychologists are interested in
analyzing the ability of humans to extract information of the others. Several factors and features are
associated with attractiveness. Some examples include facial symmetry, skin color, facial traits,
clear skin and health of facial skin. It is hypothesized that facial symmetry is an important factors in
measuring physical attractiveness. Different features may be perceived as attractive by different
people. Biologists believed that facial symmetry should be attractive because it may signal mate
quality. Rhodes, Proffit, Grady and Sumich (1998) manipulated the symmetry to figure out the
effect on attractiveness. 4 versions of a picture were created. One was perfectly symmetric, the
others were a highly symmetric version, normal level of symmetry and a low symmetric version.64
subjects rated these faces. The results clearly stated that perfect symmetry was significantly more
attractive and low symmetry faces were unattractive, more over the males found the perfect
symmetric faces more appealing as potential life partners, so facial symmetry does play a role in
mate selection. In the second experiment the authors compared the attractiveness of faces at three
symmetry levels. These were normal, high and perfect. The subjects were shown two versions of the
same face at different

The Pros And Cons Of Public-Private Partnership Practice
Public–Private Partnership (PPP) practice has been increasingly prevalent in modern infrastructure
delivery and public service provision, such as in transportation, electric power, waste management,
health care, and other industries (Broadbent and Iaughlin, 2004; Essig and Batran, 2005; Hodge and
Greve, 2007; Wang, 2015; Zhang et al., 2015). Popularity of PPPs is mainly attributed to some
inherent efficiency advantages (Grimsey and Lewis, 2007; Hart, 2003; Yang and Wang, 2013).
Unlike conventional public procurement, PPP takes an integration of financing, construction,
operation and maintenance that granted to private sector. This internalizes previous stage's external
effect to subsequent one, since the private is responsible for the additional ... Show more content on
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While in an uncertain environment, it is almost impossible to accurately forecast all contingencies in
the future (Hart, 2003; Williams, 2008, 2011). In this case, the public agency cannot differentiate
whether the bad PPP performance should be attributed to private sector's opportunistic behavior or
the adverse influence of external environment. This suggests that effective governance on PPPs
should take the uncertain environment into

Stiglitz And Weiss's Theory Of Information Asymmetry
The basic concept of Stiglitz and Weiss's (1981) theory of information asymmetry is a phenomenon
where one group is better informed than other groups creating an unbalanced information power
play. The theory of information asymmetry arises when the company shareholders and management
are better informed about a company's financial prospects than the external investors (López–Gracia
& Sogorb–Mira 2008). In the case of SME financing, SME owners aware of information on the
firm's future prospects, in particular the financial status, while investors are not provided by SMEs
with the same information leading to an information gap between the two (Binks, Ennew & Reed
1992; Holmes et al. 2003).
The asymmetric information theory is extended into principal–agent issues and credit rationing in
the market. The theory of information asymmetry is the theoretical foundation of SME financing
constraints in relation to finance providers. The critical restraint of SMEs when it comes to access to
external finance is higher level of ... Show more content on Helpwriting.net ...
Jensen and Meckling (1976)'s work indicated that financial statements of the firms helped not only
in informed decision making, but mitigated the issue of information asymmetry for banks in
assessing firm risk (Drever, Stanton & McGowan 2007; Michaelas, Chittenden & Poutziouris 1999).
Kira and He's (2012) work on Tanzanian SMEs revealed that it was easier for larger firms and
corporations with publicly declared financial statements to access debt financing than SMEs. SMEs
are not under any legal obligation to produce and share any verifiable information with the public.
Drever, Stanton and McGowan (2007) argued that even when SMEs maintained financial reports; it
was mainly produced in relation to tax reporting or for other non–securities regulatory filing
purposes and not to be shared in the financial

Milton Friedman Summary
American Economists, Milton Friedman stated in his famous 1970 New York Times Magazine
article, "the manager is the agent of the individuals who own the corporation", he continues with
writing about how the manager's primary "responsibility is to conduct the business in accordance
with [the owner's] desires". While at this time, this assumption was greatly appreciated considered,
many economists have to come to the realization that there are a lot of flaws associated with this
view. It has since then been developed and critiqued. In this essay, it is my intention to discuss the
implications and problems that came along with Friedman's opinion. Touching upon theories such as
the principal–agent theory to solidify the limitations of this view in practice. I will also discuss the
relationship between a shareholder–centered perspective and value–transfer and value–creation.
First, we must understand what Friedman's view is on corporate social responsibility. What are the
social responsibilities that a corporation must follow? Friedman discussed in his article that it is the
corporation's responsibility to make as much money as possible for the stockholder. This statement
made by him made me wonder about safety for the workers, excessive pollution, and how situations
are handled in less–developed countries and child labor laws. I think that Friedman was not aware
how this statement would be interpreted, especially in an inappropriate way. He was probably
looking at the short

Essay about How the Downfall of RBS Could Have Been Prevented
1. What is the core idea behind agency theory?
2. Can you use agency theory to analyse:
a. the rise and downfall of RBS;
b. the mortgage debt crisis more generally?
3. Who is/are the principal(s) and who is/are the agent(s) in your analysis?
Can you think of one threat that arises from the use of agency theory in developing measures aimed
to prevent future banking and/or financial failures?
The emergency rescue of the Royal Bank of Scotland in 2008 has cost the UK government thus the
British taxpayer a huge amount of money. Many people are upset about the high bonuses the RBS
management board have received, both because of the outrageously high amount and because the
performance of the bank on the long–term was not good at all. ... Show more content on
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By pursuing this, the manager (agent) also pursues the goals of the shareholders (principals). At
least that is the idea behind it.
The Royal Bank of Scotland – just like many other banks and businesses – paid out its managers
considerable bonuses for their performances. Managers at RBS started maximising their bonuses by
aggressive actions such as take overs and investing in complex financial products. These actions
caused the profits of RBS to grow rapidly, which meant high bonuses for the managers. These
actions, however, also meant the stability and financial safety of RBS on the long–term got worse
and worse. This was not a problem for the managers as they had already earned their bonuses. A
different bonus structure probably would have prevented the reckless actions of the RBS managers.
Bonuses of managers could be paid out in shares which they are obliged to keep for a certain time
period, e.g. 5 years. That way the share price on the long term is of importance for the managers and
the goal of the shareholders is aligned with the goal of the managers. However, the share price is
dependent on much more factors than the performance of just one manager. There is a risk that
managers would feel they have little to none influence on the share price and still make risk full
decisions. Another possibility would be determining the bonus of a manager on their performance in
the long run, e.g. 5 years. A combination of these two bonus

“While Shareholders and Managers Will Have Different...
Managers are hired to act on behalf of the shareholders of a firm. However, this is not always the
case as both parties have different objectives. The difference in interests between shareholders and
managers 'derives from the separation of ownership and control in a corporation' (Berk and
DeMarzo, 2011: 921). Whereas shareholders are interested in maximising their own wealth,
managers may have more personal interests which differ to that of the shareholders. Downs and
Monsen (no date, cited in Chin, Cooley and Monsen, 1968:435) suggest that managers self–interest
lies in maximising their life–time income and that 'such self–interest will be congruent with profit
maximisation for the firm only in special cases'. This conflict between both ... Show more content
on Helpwriting.net ...
Although it may be a simple solution, there are costs involved. Berk and DeMarzo (2011:922) state
that as no one shareholder has an incentive to bear these costs, as the benefits are then divided
between all shareholders, they instead elect a board of directors to monitor the managers on their
behalf. The directors' duties include hiring the executive team, approving major investments and
acquisitions, and dismissing executives if necessary (Berk and DeMarzo, 2011: 922). The level of
monitoring required differs across firms and is 'based on the magnitude of the incentive gap between
principal and agent' (Beatty and Zajac, 1994, cited in Westphal and Zajac, 1994:125). However, the
main factor affecting the level of monitoring provided is the cost, otherwise 'all rational firms would
monitor maximally, irrespective of the strength of incentive compensation contracts or other factors'
(Westphal and Zajac, 1994:125). Although the board of directors are hired to keep a close eye on top
management, the agency problem may still exist. This will occur when the director's duties in
monitoring have been compromised as they have connections with management. A way of
overcoming this problem is to hire directors who are independent to the company, as they are
deemed to be better monitors of managerial effort. As Mehran (1995:166) states, outside directors
are 'more independent of top management and thus better represent the interests of shareholders than
do inside

Information Problems Of The Canadian Economy
Research Topic – Information Problems in Financial Markets
Introduction
Financial markets are an important aspect of the Canadian economy, its main function is to provide
a direct link between lender and borrowers. The market affects an individual 's personal wealth and
the behaviors of business. The financial market has various problems related to information and the
market channel that funds from the savers to investors would discourage economic efficiency. The
lack of information is an issue that occurs within the financial market, but it is not the main problem
at hand. The biggest problem the market faces occurs when one party in a transaction knows more
than the other. The major problem with information within the financial market is called asymmetric
information. It is academically defined as "a situation in which one party to a financial contract has
much less accurate information than the other party" (Mishkin, Policy 218). These problems not
only affect the financial market but it also in hand, affects the Canadian economy as well. The two
main forms of asymmetric information problems are adverse selection and moral hazard, they are
both major components that are directly linked to asymmetric information. In addition, even though
conflict of interest is not a form of asymmetric information itself, it still affects the financial market
and worsens the two major components as well. THESIS ABOUT WHAT THE PAPER IS ABOUT
ADVERSE SELECTION
The first form of

Financial Asymmetry And Agency Theory: The Theory Of...
The theory of financial intermediation analyses the role of financial intermediaries in the economy
and is associated with the following three key facts; information problem, transaction costs and
regulation. This theory was started by (Gurley and Shaw, 1960). It is based chiefly on information
asymmetry and agency theory.
The first fact and theory in explaining financial intermediation is the informational asymmetries
argument. These asymmetries can be of an ex ante nature, generating adverse selection, they can be
interim, generating moral hazard, and they can be of an ex post nature, resulting in auditing or costly
state verification and enforcement. The informational asymmetries generate market imperfections,
i.e. deviations from the neoclassical ... Show more content on Helpwriting.net ...
They interpret financial intermediaries as information sharing coalitions. Diamond (1984) shows
that these intermediary coalitions can achieve economies of scale. Diamond (1984) is also of the
view that financial intermediaries act as delegated monitors on behalf of ultimate savers. Monitoring
will involve increasing returns to scale, which implies that specializing may be attractive. Individual
households will delegate the monitoring activity to such a specialist, i.e. to the financial
intermediary. The households will put their deposits with the intermediary. They may withdraw the
deposits in order to discipline the intermediary in his monitoring function. Furthermore, they will
positively value the intermediary's involvement in the ultimate investment (Hart, 1995). Also, there
can be assigned a positive incentive effect of short–term debt, and in particular deposits, on bankers
(Hart and Moore, 1995). For example, Qi (1998) and Diamond and Rajan (2001) show that deposit
finance can create the right incentives for a bank's management. Liquid assets of the bank result in a
fragile financial structure that is essential for disciplining the bank manager. Note that in the case
households that do not

Symmetry In The Eyes 7 Essay
Symmetry in the Eyes 7 used to rate either attractiveness or symmetry. In conclusion, the study was
able to provide evidence that supported the perceptual bias view.
In spite of the major amount of research done to support the evolutionary view and the perceptual
bias view, other research has shown that "facial symmetry may provide information about an
individuals' quality, which is most ... Show more content on Helpwriting.net ...
Symmetry in the Eyes 9
One group was categorized as symmetrical and the other asymmetrical. The total sum of
symmetrical participants equaled 62. The symmetrical group's gender identifications consisted of 46
females, 14 males, 1 non–conforming and 1 anonymity. Symmetrical sexual orientation figurations
consisted of 48 heterosexuals, 3 homosexuals, 10 bi–sexuals, and 1 anonymity. Symmetrical
ethnicity structures consisted of 44 Caucasians, 6 African–Americans, 8 Hispanics and/or Latinos, 1
Asian and/or Pacific–Islander, 2 Native Americans and/or American Indians, and 1 Other. The mean
age of participants in the symmetrical group was 23.55 with a standard deviation of 3.6. The total
sum of asymmetrical participants equaled 73. The asymmetrical group's gender identifications
consisted of 60 females, 12 males, and 1 non–conforming. Asymmetrical sexual orientation
figurations consisted of 56 heterosexuals, 4 homosexuals, 11 bi–sexuals, and 2 other. Asymmetrical
ethnicity structures consisted of 52 Caucasians, 7 African–Americans, 5 Hispanics and/or Latinos, 2
Asians and/or Pacific Islanders, 6 Other, and 1 anonymity. The mean age of participants in the
asymmetrical group was 24.12 with a standard deviation of 3.5. All participants were treated in
accordance with the

Asymmetric Analysis : Asymmetric Information Problem
In today's world, society has an abundance of options to choose from; whether it is the type of soda
they drink, brand of clothing, or type of car. Even within a certain product, there are so many
choices; for example, purchasing a car. Customers have the option to choose what type of car, the
size, color, year, and brand. When it comes to major purchases, such as car buying, most consumers
try to do as much research as possible before making a decision. And just like there are many
characteristics of a certain product, there is a substantial amount of available resources to help make
those kinds of decisions.
Asymmetric Information Problem However, what if a company did not release all of the information
of a product and knew something ... Show more content on Helpwriting.net ...
What those advertisements usually do not say are the negatives that come with the car. While
companies may brag about how fast and powerful this new sports car is, it won't mention its
inefficiency in gas or the cost of insurance. Luckily, consumers do not have to rely solely on
advertisements and can help bridge the gap within the asymmetric information problem.
Market's Response The car market's response to asymmetric information is doing their research.
While the car ads may not show how many miles a car can go per gallon of gasoline, a quick search
on the internet can produce those results. There are many businesses dedicated for the sole purpose
of reviewing and comparing products. Even before the internet, car buyers were able to talk to
friends and neighbors and get recommendations from owners of a car they were interested in. There
are many consumers that remain loyal to a certain company, that they feel is reputable, due to past
their experiences with that company (Notte, 2014). The government has even step in to create laws
against fraud from automakers and car dealerships. Commonly referred to as "Lemon Laws", these
regulations set out to "protect the rights of consumers everywhere regarding automobiles, trucks,
motorcycles, RVs, boats, and other products, that continue to have significantly impairing
malfunctions after multiple attempts to repair the problem" (What is

Switching Cost Arise From The Asymmetry Information...
In the bank–firm relationship, switching cost arise from the asymmetry information between firms
and banks, which gives the lock–in power for banks to gain extra rent from their customers, thus
weaken the substitutability of loans offered by different banks (Shy, 2002; Vesala, 2007). In addition
to the administrative costs of changing a bank account in the loan market, there are additional costs
associated with information asymmetry that the current lender knows more about the quality of the
firm than a potential new lender. Hence, this confidentiality allows banks to exploit their
informational advantage over competitors and lock in their incumbent customers to earn higher
profits on repeated lending. Switching costs in banking can also be viewed as a source of rent that
reduces the competiveness of the market. The reminder of this proposal is organized as follows: the
next section demonstrates the background and motivation of the research topic. Section 3 reviews
literature on switching costs and also provides some relevant studies on firms' choices of remaining
a single relationship or initiating multiple relationships. Section 4 discusses institutional background
and history of China's banking industry and its reforms. Relevant literature studies on China are
banking market and effects of reforms are also included in this section. The last section discuss
about my future studies. 2. Background and Motivation Since having long and close bank–firm
relationships makes

Case Analysis : Venture Capital
Small and young firms that are riddled with uncertainty and information asymmetries between the
entrepreneur and investor have great difficulty in financing their ventures (Gompers & Lerner,
2001). Venture capital (VC) firms act as financial intermediaries (LiPuma & Park, 2013), more often
that not acquire equity positions in the project as well as lend their influence on management (Barry
et. al, 1990). It is important to note the significance and importance of VC's to economic growth
where companies like Apple, Cisco Systems, Microsoft, and others were all invested in by VC firms
(Schmidt, 2003). The connection between the VC and the entrepreneur (E) has long been under
scrutiny, with the agency theory governing the rationalization of the relationship (Sapienza &
Gupta, 1994). Agency theory can be described as the 'actions that focus on the protection of the
investment of the principal against the harmful behaviours of the agent' (Jensen & Meckling, 1976).
Agency risk arises by the inability and difficulty of supervising the conflicting goals of the
entrepreneur (Fiet, 1995). It initially arises in the VC–E relationship when the E approaches the VC
for financing (Sahlman, 1990), being propounded with the varying goals and risk profiles (Bruton et
al., 1997). Stewardship theory, similarly to agency theory emphases that there exists goal alignment
between the VC and E, however, it is seen that it proves to be inadequate in further explaining the
relationship as it assumes

Regulation of Financial Accounting and Reporting: the...
Regulation is defined as a set of rules that is designed to control and govern conduct by authority
(Deegan 2009, p.59). On the basis of this definition, Deegan (2009, p.59) has defined regulations
relating to financial accounting as rules that are developed by independent authoritative body to
govern the preparation of financial statements which are accounting standards. Since decades ago,
there have been arguments for and against the existence of accounting regulations. With a stance of
pro–regulation, this essay is going to examine the reasons that financial accounting and reporting
should be regulated and the merits of accounting regulations.
Firstly, financial reports are normally prepared by the management of the company who are ... Show
more content on Helpwriting.net ...
With accounting regulations that create minimum disclosure requirements, all investors will then be
equipped with same accounting information so insider information and inequity of opportunities
will be reduced.
Secondly, the claim made by 'free market' perspective to treat accounting information as other
normal goods should be rejected because accounting information are unlike normal goods such as
bread or house. It is a public good because the use of it by one investor does not prevent the usage
of others (Hendriksen & Breda 1992, p.247). As non–investors have right to use the accounting
information such as income statement and balance sheet as much as investors, investors will not
agree to pay for the financial reports because others will become free–rider; thus, this prevent the
function of normal pricing system of accounting information. As no income is received by
producers of financial reports, they will not willing to produce it or will underproduce it so 'free–
market' perspective is not applicable. Under this circumstance, Demski and Feltham (cited in
Deegan 2009, p.65) states that for public good like accounting information, a more collective
approach to its production is more desirable. This can be achieved by legislatively regulating the
productions of accounting information so companies will produce the accounting information to
meet the demands of external users and thus ensuring efficient capital market.
According to Godfrey, Hodgson, Holmes and

Delegated Portfolio Management
DELEGATED PORTFOLIO MANAGEMENT: A SURVEY OF THE THEORETICAL
LITERATURE
Livio Stracca European Central Bank
Abstract. This paper provides a selective review of the theoretical literature on
delegated portfolio management as a principal–agent relationship. The main focus of the paper is to
review the analytical issues raised by the peculiar nature of the delegated portfolio management
relationship within the broader class of principal– agent models. In particular, the paper discusses
the performance of linear versus nonlinear compensation contracts in a single–period setting, the
possible effects of limited liability of portfolio managers, the role of reputational concerns in a
multiperiod framework, and the incentives to noise trading. ... Show more content on
Helpwriting.net ...
Nonetheless, the outcome does not depend only on the agent's effort, but also on environmental
factors outside his control. The task of the landlord is to design a contract which encourages the best
tenants to participate and, at the same time, gives the tenant the right incentives to work hard to
achieve the result after the contract is signed. If the agent is risk neutral, the best contract makes the
agent the residual claimant of the contract and the principal is paid a flat fee by the agent. These
performancerelated contracts normally ensure that 'good' agents enter the contract and charlatans are
left out, and at the same time provide the best incentives to the agent for expending costly effort.
Moreover, if the principal is risk averse, the contract is also optimal for him from the standpoint of
risk minimization. If, more realistically, the agent is risk averse and has no access to credit markets
on the same terms as the principal, there is an obvious trade–off between inducing effort (which
requires the agent to be exposed to the risky outcome) and providing insurance (which goes in the
opposite direction). For this situation, the literature has reached two main results. First, it may be
convenient for the principal to isolate the agent

Advantages Of Trade And Specialization
Before the industrial revolution, most economic growth came from trade and specialization rather
than technological growth. But trade had its advantages and its disadvantages. In pre–modern trade,
the major defect was the principal–agent problem, and this problem would prevent any rise of trade,
but since early, people could manage to find some ways to deal with the principal–agent problem in
order to exchange goods and services and to trigger economic growth.
In pre–modern era, some societies started getting benefits from long distance trade and
specialization rather than technological change. Trade was encouraged by the similarities such as
religion, currency and language in addition to proximity of societies. Due to a lack in a proper legal
system and contract enforcement, principal–agent problems were significant but societies always
found indirect rules and informal mechanisms, in order to continue exchanging goods and services.
As Persson said, "the principal–agent problem is the type of problem that arises when an agent is
hired by a principal and the former has more information than the latter, and the parties do not share
the same objectives. The ... Show more content on Helpwriting.net ...
It was in the agent best interest to be honest and not to make mistakes. At that period in the
medieval trade, there were two mechanisms of trust: ex–ante and fear of god. Ex– ante corresponds
to the reputation of the agent in his past transactions, while under the "fear of god mechanism", the
agent is honest out of desire to keep his position. As solidarity and loyalty were strong values in the
relationship between principals and agents, any mistakes were reported, and thus before hiring any
agent, the principal would first ask about his "ex–ante"

Acknowledging National Tobacco Strategy Through Social...
Irham Adhitya
S 3617798
"Acknowledging National Tobacco Strategy through Social Democracy Lens "
Introduction
Australia is the world leader in tobacco control, as they became the first country that implemented
plain package policy. Since December 2012, all tobacco products which are traded and brought to
Australia must be in plain packaging in order to implement the National Tobacco Strategy (NTS)
2012 – 2018. (National Tobacco Strategy, 2012, p.27) The range of policies including health signs
on packaging, mass media campaigns, bans on tobacco promotion, price increases, and controls on
smoking and access to tobacco were implemented (ibid, p.1). As a result, 2014–2015 data shows
that 14.5 percent aged 18 years and above were daily smokers (2.6 million adults), dropped from 16
percent in 2011–12. This reduction is a continuation of the trend over the past two decades. In 2001,
22.4 percent of adults smoked daily, while 23.8% of adults smoked daily in 1995 (Australian Bureau
of Statistic, 2015).
To recognise Australia's successes in handling tobacco problems, this essay will use social
democracy perspectives as key theoretical frameworks to the National Tobacco Strategy in
Australia. According to its supporters, social democracy is the best way to organise an economic
system or society because it seeks to peacefully build a healthy society (Judt, T, 2005). In this case,
social democracy believes that smokers and the market are irrational and, therefore, the government

Real Estate Agents: An Argumentative Analysis
The main argument discussed in chapter two, "How is the Ku Klux Klan Like a Group of Real–
Estate Agents," is the importance of information. Throughout the chapter, the authors discuss the
advantages that information grants to its holders and the disadvantages it imposes on its seekers.
According to the authors, this partiality of information in the hands of one rather than another is
known as information asymmetry:"In the parlance of economists, such a case is known as an
information asymmetry. We accept as a verity of capitalism that someone (usually an expert) knows
more than someone else (usually a consumer)."Although this idea is supported using many
examples, the most profound are the Ku Klux Klan, real–estate agents, and funeral directors. In the
example of the Ku Klux Klan, we learn about its rise to power and how it eventually began to exert
influence over peoples' lives:"they targeted former slaves and any whites who supported the blacks'
rights to vote, acquire land or gain ... Show more content on Helpwriting.net ...
Nevertheless, we also learn of the Klan's downfall due to the exposition of the information known
only to the Klan members: "Brown divulged what he was learning at the weekly Klan meetings: the
identities of the Klan's local and regional leaders; their upcoming plans; the Klan's current rituals,
passwords, and language." Therefore, because the Klan's secrecy was decimated, its lure dwindled
and the fear it exerted over the oppressed virtually disappeared. The Ku Klux Klan is a perfect
example of how one can manipulate information to his benefit or the benefit of others.
Additionally,we learn through the real–estate agents example that they have their own agendas when
selling

Hayek's View Of Governing Inequality
Social inequality can either be considered natural and necessary as inequalities creates incentives for
individuals to work harder, or it can be considered systematic, an integral feature of social order that
creates winners and losers. The former view would not consider inequality a public matter, therefore
does not require governing. The latter however, would consider inequality a public issue that can
only be reduced by government implementing policies to so. This essay will compare and contrast
Hayek's view of governing inequality with that of Stiglitz.
To Hayek, strong state intervention restricts the freedom of individuals. His concept of freedom is
without coercion and he is clear that people can only be coerced by other people and not by
circumstance. Those who are unemployed or those who are living in poverty do so because of the
market's function of rewarding those with certain skills and penalizing those without. For Hayek,
while these people may be suffering, they are not coerced because the market is an impersonal
mechanism. (Blakeley and Clarke, p. 353) It is only constraint of freedom by people that is
damaging. According to him, any intervention from the state to regulate society, however well
intentioned the motives, will inevitably lead to coercive government, and ultimately a loss of
freedom. Hayek views inequality as natural because they are a result of the differences in innate
human nature. It is his view that some people are just more gifted than

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