Principle Agent Problem

In: Business and Management

Submitted By HaydenHill
Words 1571
Pages 7
Principal-agent problems arise through the misalignment of interests between individuals or groups within an organisation. They can occur in various parts of an organisational structure, for instance in Labour; between an employer and an employee, Franchises; the franchisor and franchisee, Regulation; the regulator and the regulated company through to Investors; between the Shareholders and company Executives (Fingleton, J. 2012) The strength and alignment of these relationships are vital for the smooth successful operation of organisations, problems can occur in both the public sector in healthcare through doctor-patient-pharmaceutical company relationships and also in government, whilst more commonly known in the private sector through labour and investor related problems.
This report will evaluate the effects of the principal-agent problem within firms by considering real world examples of where they may have occurred and what methods organisations use to address the issue.

Empirical Evidence

Empirical evidenceThere is however considerable empirical evidence of a positive effect of compensation on performance (although the studies usually involve “simple” jobs where aggregate measures of performance are available, which is where piece rates should be most effective). In one study, Lazear (1996) saw productivity rising by 44% (and wages by 10%) in a change from salary to piece rates, with a half of the productivity gain due to worker selection effects. Research shows that pay for performance increases performance when the task at hand is more repetitive, and reduces performance when the task at hand requires more creative thinking.[2]

Paarsch and Shearer (1996) also find evidence supportive of incentive and productivity effects from piece rates, as do Banker, Lee, and Potter (1996), although the latter do not distinguish between incentive and worker…...

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