Class 3 Homework
1. The principle-agent problem is the agents’ pursuit of their self-interest instead of the principal’s. This happens because most employees in a chain of command are both principals to those who report to them and agents to those to whom they report. Given that, when hired to do a talk, agents maximize their utility, but they may not be maximizing the principal’s utility. Most principle-agency problems involve balancing stronger incentives for the agent to work hard against higher risk premium required by the agent to compensate for the additional risk involved.
2. Agency costs are a concept regarding the cost to a principal when the principal choose an agent to act on their behalf. A decline in firm value can result from agents pursuing their own interest to the detriment of the principal’s interest. These can also arise when an agent seeks larger organizations to manage for the sole purpose of increasing either their job security or their pay. Examples of agency costs are screening costs, bonding costs, restriction/sanctioning, monitoring, and residual agency costs.
3. The term “information asymmetry” means that there is a situation where a party in a transaction has more information compared to another. For example, the principal possess less information than the agent. Because of information asymmetry, agency problems arise.
4. Draft Answers to questions 1 -5 of today’s In-Class Activity
1. The goals of an owner of a restaurant are to provide high-quality food, an excellent dining experience, and to retain customers while also making a profit at the same time. In order to do this, the owner must make it their mission to achieve the goals through their employees. That means hiring qualified employees and giving each the same training to provide great service and food to customers.
2. The principal-agent relationship among the server and cook relationship is that the cook may cook a meal that’s below-average quality, and therefore, the customer tips poorly, but the cook doesn’t care because the cook isn’t getting any portion of that money. Also, the serve could have provided excellent service, but isn’t being tipped correctly because of the poor quality food. In our current system of tipping, it doesn’t not help the goals of the agent with those of his/her principal. Since only one party receives the tip, it gives less incentive for the other party to work hard as well.
3. Some tricks servers in restaurants can use to earn higher tips to touch their customers when speaking to them, squatting at the table, or to start a conversation with the table rather than just introduce yourself. Characteristics of a server that receives the greatest amount in tips are if you’re an attractive waitress, being blonde, being a slender women,