Corporate Strategic Management Agents and Principal Realtions Discussion

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Economics

Corporate Strategic Management

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Consider the relationship between a principal and its agents, agents are divided into highly productive H type and low productive L type. When an agent performs work for x hours, he/she gets a reward w for it. However, the agents have no place to work other than this principal. H type agents produces 8√x results from x hours of work, while L type agents produces 4√x results. Corporate profit is the result of the agents’ result minus the remuneration w, and the utility of the agent is defined by u = w - x.

Problem;

The principal does not know the type of agents but knows that the ratio of H type is 1/3 and the ratio of L type is 2/3, find the combinations or contracts (x, w) that enable the screening of agents but at the same time, maximises the profit of the principal.

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Consider the relationship between a principal and its agents, agents are divided into highly productive H type and low productive L type. When an agent performs work for x hours, he/she gets a reward w for it. However, the agents have no place to work other than this principal. H type agents produces 8√x results from x hours of work, while L type agents produces 4√x results. Corporate profit is the result of the agents’ result minus the remuneration w, and the utility of the agent is defined by u = w - x. Problem; The principal does not know the type of agents but knows that the ratio of H type is 1/3 and the ratio of L type is 2/3, find the combinations or contracts (x, w) that enable the screening of agents but at the same time, maximises the profit of the principal.
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Explanation & Answer

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Agency Relationship1

Agency Relationship
Name:
Instituition:

Agency Relationship2
The relationship between the principals and agents is considered a fiduciary relationship. This
happens where the principal give authority of the agent to act on his/her behalf(Principal-Agent
Problem, 2019). In this case, the agent is subject to the principal’s controls and must abide by the
regulations, and follows the instructions. This agency relationship is active and often include the
employer and the employee. The main requirement here is the manifestation of the permission from
the two parties. Which usually is done in the form of writing or oral(Principal-Agent Problem, 2019).
In the case presented: Consider the relationship between a principal and its agents, agents
are divided into highly productive H type and low abundant L type. When an agent performs
work for x hours, he/she gets a reward w for it. However, the agents have no place to work other
than this principal. H type agents produce 8√x results from x hours of work, while L type agents
produce 4√x results. Corporate profit is the result of the agents' development minus the
remuneration w, and the utility of the agent is defined by u = w - x.
Problem;
The principal does not know the type of agents but knows that the ratio of H type is 1/3 and the
percentage of L type is 2/3, find the combinations or contracts (x, w) that enable the screening of
agents but at the same time, maximizes the profit of the principal.

We invoke the idea of human capital and labour signalling where modelling is done with
some introduction of ghost variables for further explanation(“Agency Relationship,” 1968).
We take this as we have two types of workers with high and low abilities. We take the
assumption that the production of highly productive agents produces yH. The low productive
ones grow yL. Assuming that the Cost of obtaining or building in the high productive is cH,
while for low abundant is cL. The following inequality takes the assumption cL > cH, which
indicates that Cost for production in low productive ones is higher than the Cost associated with
High productive. In the scenario, therefore, the competition among a large number of risk-neutral
firms, the agents are paid their expected productivity. The times of events follow the ability of
each worker.
The assumptions that prevail presents that the ability of workers is dynamic and have
correspondences in active games making and incomplete competition because the agents know
their knowledge, but the firms don't know. The case is referred to as the perfect Bayesian
equilibrium with the strategy profile (sigma) and the brief profile (mean).
When characterizing the equilibrium, which illustrates how the Cost can be valued, however,
there is no direct relationship with the productive role.
yH - cH > yL >yH – cL
which shows that Cost for high productivity is less than Cost for low productivity.

Agency Relationship3

When the wages are introduced, it relates directly to education, where it under the
assumption that the production cost has a direct relationship with Cost of education(Sejdini,
2014). The high productive agents are taken to have obtained the education while the low

productive are regarded to have received little or no education. The wages, therefore, can be
expressed as
w(H) =yH and w(L) = yL.
The wages have a direct relationship with education but not to the production.
This can be seen as in the graph below:

The generalized wage structure is given as:
yH − cH > (1 − λ) yL + λyH and yL > yH − cL.
Where: (1 − λ) yL+λyH, is taken to be the expected production or the agents with little or
no education(Sejdini, 2014). from the case, H type agents produce 8√x results from x hours of
work, while L type agents produce 4√x results. Which shows the=at the H type works twice the
results of the L type of agents. Given that the principal does not know the kind of agents, but the

Agency Relationship4

ratio of H type is 1/3, and the rate of L type is 2/3. It shows that the L type is many, as compared
to the whole group or the population represented (λ) in the generalized wage structure.

Agency Relationship5

References
Group Insurance Policies: The Employer/Insurer Agency Relationship. (, 1968). Duke Law
Journal, 1968(...


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