MORDOVIA STATE UNIVERSITY
named after N.P. Ogareva
Coase's theorem."
Prepared by: Saushkina E.G.
student of group 101
specialty: "accounting"
Checked by: Kerzhemankin D. A.
Saransk 2004
Introduction.
1. Transaction costs.
2. Concept and types of transactions.
3. Transaction costs and their types.
4. Ronald Coase
5. Coase theorem
Conclusion.
Bibliography.
Introduction
In the past, economic theory suffered because it could not clearly formulate its premises. While developing the theory, economists often avoided examining the foundations on which it was built. But such research is essential not only to prevent false interpretations and unnecessary disputes that arise from insufficient knowledge of the initial principles of the theory, but also because of the extreme importance for economic theory of rational judgment in choosing between competing sets of theoretical premises.
Perhaps the central section of microeconomic theory is the theory of the firm, which enriched economic science with the concept of transaction costs. The use of this particular concept for the study of economic processes currently appears to be very fruitful. It is the possibility of reducing transaction costs that makes the replacement of market exchange effective internal organization, which explains the existence of firms.
Transaction costs (costs)
The theory of transaction costs is an integral part of a new direction in modern economic science - neo-institutionalism. Its development is primarily associated with the names of two economists - R. Coase and O. Williamson.
The basic unit of analysis in the theory of transaction costs is an act of economic interaction, a deal, a transaction. The category of transaction is understood extremely broadly and is used to denote the exchange of both goods and legal obligations, transactions of both short-term and long-term nature, requiring both detailed documentation, and presupposing a simple mutual understanding of the parties. The costs and losses that may accompany such interaction are called transaction costs.
Transaction costs are the central explanatory category of all neoinstitutional analysis. Orthodox neoclassical theory viewed the market as a perfect mechanism where there is no need to take into account the costs of servicing transactions. The key importance for the operation of the economic system of transaction costs was realized thanks to the article by R. Coase “The Nature of the Firm” (1937). He showed that in every transaction it is necessary to negotiate, supervise, establish relationships, and resolve disagreements.
Initially, transaction costs were defined by R. Coase as “the costs of using the market mechanism.” Later this concept became more broad meaning. It has come to mean any types of costs that accompany the interaction of economic agents, regardless of where it takes place - on the market or within organizations, since business cooperation within hierarchical structures (such as firms) is also not free from friction and losses. According to the most widely recognized definition by K. Dahlman, transaction costs include the costs of collecting and processing information, conducting negotiations and making decisions, monitoring compliance with contracts and enforcing their implementation. The introduction of the idea of positive transaction costs into scientific circulation was a major theoretical achievement.
Concept and types of transactions
The concept of transaction was first introduced into scientific circulation by J. Commons.
A transaction is not an exchange of goods, but an alienation and appropriation of property rights and freedoms created by society. This definition makes sense (Commons) because institutions ensure that the will of an individual extends beyond the area within which he can influence environment directly by their actions, i.e. beyond the scope of physical control, and therefore turn out to be transactions in contrast to individual behavior as such or the exchange of goods.
Commons distinguished three main types of transactions:
1) Deal transaction– serves to implement the actual alienation and appropriation of property rights and freedoms, and its implementation requires mutual consent of the parties, based on the economic interest of each of them.
2) Control transaction– the key in it is the relationship of management of subordination, which involves such interaction between people when the right to make decisions belongs to only one party.
3) Rationing transaction– it preserves asymmetry legal status sides, but place managing party occupies a collective body that performs the function of specifying rights. Rationing transactions include: drawing up a company budget by the board of directors, the federal budget by the government and approval by a representative body, an arbitration court decision regarding a dispute arising between existing entities through which wealth is distributed. There is no control in the rationing transaction.
Through such a transaction, wealth is allocated to one or another economic agent.
The presence of transaction costs makes certain types of transactions more or less economical depending on the circumstances of time and place. Therefore, the same operations can be mediated by different types of transactions depending on the rules that they order.
Transactions can be simple, for example, buying a bunch of radishes on the market, or complex, for example, implementing an ERP system with the help of external consultants. Complex and responsible agreements are always formalized by contracts.
Any Transaction consists of two parts:
- Preparation of an agreement. At this phase, the buyer must find a seller, collect information on prices (ask the price), evaluate the quality, select a seller and come to an agreement with him. The seller must buy a place on the market, undergo quality control of his goods, and continuously collect information on prices.
- Implementation of the agreement. At this phase, the buyer pays for the product, receives it at his disposal, and evaluates its quality again.
Each Transaction necessarily defines 4 groups of parameters:
- Transaction participants
- The resources used in the transaction and the expected results,
- The rights of participants to resources and results,
- Duties of the parties.
3. Transaction costs and their types.
Transaction costs are any losses arising from the ineffectiveness of joint decisions, plans, concluded contracts and created structures. Transaction costs limit the possibilities for mutually beneficial cooperation.
Developing Coase's analysis, supporters of the transaction approach proposed various classifications of transaction costs (costs). In accordance with one of them, the following are distinguished:
1. Costs of searching for information. Before a transaction is made, it is necessary to have information about where potential buyers or sellers of consumer goods or production factors can be found and what the prevailing conditions are. this moment prices. Costs of this kind consist of the time and resources required to conduct the search, as well as losses associated with the incompleteness and imperfection of the information received.
2. Negotiation costs. The market requires the diversion of significant funds for negotiations on the terms of exchange, for the conclusion and execution of contracts. The more participants in the transaction and the more complex the subject matter, the higher these costs. Losses due to unsuccessfully concluded, poorly executed and unreliably protected agreements are powerful source these costs.
3. Measurement costs. Any product or service is a set of characteristics. When exchanging, only a few of them are inevitably taken into account, and the accuracy of their assessment can be extremely approximate. Sometimes the qualities of a product of interest are generally immeasurable and one has to use intuition to evaluate them. The purpose of their economy is determined by such forms of business practice as warranty repair, branded labels,
4. Costs of specification and protection of property rights. This category includes the costs of maintaining courts, arbitration, government agencies, the cost of time and resources required to restore violated rights, as well as losses from their poor specification and unreliable protection.
5. Costs of opportunistic behavior. The term "opportunistic behavior" was introduced by O. Williamson. This is the name of dishonest behavior that violates the terms of the transaction or is aimed at obtaining unilateral benefits to the detriment of the partner. Various cases of lying, deceit, loafing at work, and neglecting one’s obligations fall under this heading. There are two main forms of opportunism, the first of which is characteristic of relations within organizations, and the second of market transactions.
Shiking(shirking) is work with less impact and responsibility than it should be under the terms of the contract. When there is no possibility of effective control over an agent, he may begin to act based on his own interests, which do not necessarily coincide with the interests of the company that hired him. The problem becomes especially acute when people work together (as a "team") and each person's personal contribution is very difficult to determine.
Extortion(holding-up) is observed in cases where one of the agents has made investments in specific assets. Then his partners have the opportunity to claim part of the income from these assets, threatening otherwise to break off relations (for this purpose, they can begin to insist on revising the price of the product received, improving its quality, increasing the volume of supplies, etc.). The threat of extortion undermines incentives to invest in specific assets.
6. Costs of "politicization". This general term can be used to describe the costs that accompany decision making within organizations. If participants are endowed with equal rights, then decisions are made on a collective basis, by voting. If they are located at different levels of the hierarchical ladder, then the superiors unilaterally make decisions that are binding on the subordinates.
4. Ronald Coase
The nineties of the 20th century brought success to economists in the study of markets, property, firms, and corporations. A unique synthesis of neoclassicism and institutionalism, “pure” theory and applied developments, macro- and microeconomic analysis was formed. The rapid implementation of theoretical results into practice makes us repeat the words of one of the outstanding physicists: “There is nothing more practical than a good theory.” The world of economists is talking about a new paradigm in science that can determine both the future of the economy itself and its application in a wide variety of areas of the economy. One of the troublemakers was an American
Ronald Coase ( Nobel laureate 1991).
Ronald Coase received his award “for pioneering work on the problems of transaction costs and property rights” at a very old age - an 80-year-old professor at the University of Chicago had retired more than 10 years ago. He was born in 1910 in Great Britain and graduated from the London School of Economics. After moving to the USA, he worked at the University of Virginia and the University of Chicago. Coase's works serve as a brilliant refutation of the now seemingly irrefutable opinion that success in economic research can only be achieved by using mathematical methods, constructing multi-factor models. In Coase's works there are no formalized models, mathematical calculations, or even graphs and diagrams. However, they (only three articles published in 1937, 1946 and 1960) revolutionized the vision of economic reality, served as a source of paradigmatic changes in modern economic analysis, and gave rise to whole line rapidly developing scientific concepts.
Coase's ideas were not immediately understood and accepted. Published in 1937, the article “The Nature of the Firm” did not make any impression at the time. The attention of scientists at that time was focused on the macroeconomic theory of Keynes, on works analyzing “market failures” and justifying the inevitability of state regulation of the market system. Coase, in this and subsequent publications, approached the problems of the market, the firm, and the state from a completely different angle. In the end, his ideas began to cause serious objections from many American economists, especially professors at the University of Chicago, who were literally discouraged by the paradoxical approaches and conclusions of not the most eminent of scientists.
It seemed that the provisions about “market failures”, about the inevitability of state regulation of monopolies, education financing and solutions seemed generally accepted and known even to college students. environmental problems, were turned upside down. Coase, he writes, “was forced to express his thoughts more fully” by publishing “The Problem of Social Costs.” Since that time, the theories of “property rights” and “transaction costs” developed by the scientist began to gain recognition, and what is especially important, their application in practice turns out to be effective.
5. Coase theorem.
An analysis of the problem of social costs led Coase to the conclusion that J. Stigler called “Coase theorem”(Coase theorem). Its essence is that, if the property rights of all parties , carefully defined, and transaction costs are equal to the bullet, the final result (maximizing the value of production) does not depend on changes in the distribution of property rights.
Transaction costs are zero, which means:
- Everyone knows everything and learns new things instantly and unambiguously. Everyone understands each other perfectly, that is, words are not needed.
- Everyone's expectations and interests are always aligned with everyone else. When conditions change, approval occurs instantly. Any opportunistic behavior is excluded.
- Each product or resource has many substitutes.
Under these conditions, “the initial distribution of property rights does not at all affect the structure of production, since ultimately each of the rights will end up in the hands of the owner who is able to offer the highest price for it based on the most effective use of this right.”
A comparison of the pricing system, which includes liability for damage from negative external effects, with the pricing system, when there is no such liability, led R. Coase to the seemingly paradoxical conclusion that if the participants can agree themselves, and the costs of such negotiations are negligible (transactional costs are zero), then in both cases under the conditions perfect competition the highest possible production value is achieved.
However, when transaction costs are taken into account, the desired result may not be achieved. The fact is that the high cost of obtaining the necessary information, negotiating and litigation may exceed the possible benefits of concluding a deal. In addition, when assessing damage, significant differences in consumer preferences cannot be ruled out (for example, one person values the same damage much more than another). To account for these differences, the income effect clause was later introduced into the formulation of the Coase theorem.
Experimental studies have shown that the Coase theorem is true for a limited number of participants in a transaction (two or three). As the number of participants increases, transaction costs increase sharply and the assumption of their zero value ceases to be correct.
It is interesting to note that the Coase theorem proves the meaning of transaction costs “by contradiction”. In reality, they play a huge role and it is surprising that until recently neoclassical economic theory did not notice them at all.
A huge contribution to transaction theory was made by: O. Williamson, A. Alchiani, G. Demset, S. Grosman and others.
Conclusion
Transaction cost theorists have been able to identify the most important characteristics that define the essence of a firm. This is the formation of a complex network of contracts, long-term nature business relations, production by a single “team”, investment in specific assets, administrative mechanism of coordination using orders. All explanations that developed the ideas of R. Coase were based on general idea about the company as a tool for saving transaction costs.
According to the theory of transaction costs, this key principle explains not only the very fact of the existence of firms, but also many particular aspects of their functioning - financial structure, forms of management, organization of the labor process, etc. The fruitfulness of this approach was confirmed in the study of hybrid organizational forms, intermediate between the market and the company, such as franchising. He contributed to a radical revision of ideas in the field of antitrust regulation, demonstrating that many atypical forms of business practice are explained not by the pursuit of monopoly advantages, but by the desire to save transaction costs.
The theory of transaction costs has become widespread in our country. Modern representatives of which are Malakhov S., Kokorev V., Barsukova S.Yu., Shastiko A.E., Kapelyushnikov R.I. and etc.
For example, Malakhov considers the role of transaction costs in the Russian economy. Kokorev analyzes their dynamics. Barsukova highlights transaction costs in small businesses.
Thanks to the transactional approach, modern economic theory has acquired greater realism, having discovered a wide range of phenomena in business life that were previously completely out of its field of vision.
Bibliography.
1. Borisov E.F. Economic theory. M.: YURAYT, 2002
2. Valovoy D.V. Political Economy. M.: Prospekt, 1999
3. Dobrynina A.I., Tarasevich L.S. Economic theory. M.: 2001
4. Barsukova S.Yu. Transaction costs of entering the market of small businesses // Problems of forecasting. - 2000. - No. 1.
5. Kamaev V.D. Economic theory. Moscow UNITY, 2002
6. Mugalimov M.G. Basics of economic theory. LLC "Interpressservice", UE "EKOPERSPECTIVA", Minsk, 2002
7. Malakhov S. Transaction costs in the Russian economy //
Economic Issues - 1997.- No. 7
8. Malakhov S. Transaction costs and macroeconomic equilibrium
// Economic Issues. – 1998. -№11.
9. Kokorev V. Institutional transformations in modern Russia:
analysis of the dynamics of transaction costs // Questions of Economics. - 1996.-
10. http://ise.openlab.spb.ru
11. http://ie.boom.ru
Transaction costs are the costs in the sphere of exchange associated with the transfer of property rights. The category of transaction costs was introduced into economics in the 1930s by Ronald Coase and has now become widespread. There are usually five main forms of transaction costs:
1) costs of searching for information associated with the asymmetry of information, the search for producers or consumers;
2) the costs of negotiating and concluding contracts;
3) measurement costs (errors are possible);
4) costs of specification and protection of property rights (especially if there is no reliable protection);
5) the costs of opportunistic behavior, since the behavior of the parties after concluding a contract is difficult to predict.
The costs of searching for information are associated with its asymmetric distribution in the market: time and money have to be spent searching for potential buyers or sellers. Incompleteness of available information results in additional costs associated with purchasing goods at prices above equilibrium (or selling below equilibrium); with losses arising from the purchase of substitute goods.
Negotiation and contracting costs also require time and resources. Costs associated with negotiations on the terms of sale and legal registration of the transaction often significantly increase the price of the item being sold.
A significant part of transaction costs consists of measurement costs, which are associated not only with direct costs of measuring equipment and the measurement process itself, but also with errors that arise in this process. In addition, for a number of goods and services, only indirect or ambiguous measurement is allowed. How, for example, can one assess the qualifications of a hired worker or the quality of a purchased car? Certain savings are caused by stan-
product identification, as well as guarantees provided by the company (free warranty repairs, the right to exchange defective products for good ones, etc.). However, these measures cannot completely eliminate measurement costs.
The costs of specification and protection of property rights are especially high. In a society where there is no reliable legal protection, cases of constant violation of rights are not uncommon. The time and money required to restore them can be extremely high. This should also include the costs of maintaining judicial and government bodies that guard law and order.
The costs of opportunistic behavior are also associated with information asymmetry, although they are not limited to it. The fact is that post-contract behavior is very difficult to predict. Dishonest individuals will fulfill the terms of the contract to the minimum or even evade their fulfillment (if sanctions are not provided). Such moral hazard always exists. It is especially great in conditions of joint work - working as a “team”, when the contribution of everyone cannot be clearly separated from the efforts of other team members, especially if the potential capabilities of each are completely unknown. So, opportunistic is the behavior of an individual who evades the terms of a contract in order to make a profit at the expense of partners. It can take the form of extortion or blackmail when the role of those team members who cannot be replaced by others becomes apparent. Using their relative advantages, such team members can demand special working conditions or pay for themselves, blackmailing others with the threat of leaving the team.
Thus, transaction costs arise before the exchange process, during the exchange process, and after it.
The deepening division of labor and the development of specialization contribute to the growth of transaction costs. Their size also depends on the form of ownership dominant in society.
Coase theorem
R. Coase's theorem: If the property rights of all parties are determined and transaction costs are equal to zero, then the final result, which maximizes the value of production, does not depend on changes in the distribution of property rights.
The Coase theorem shows that, under conditions of guarantee of private property, the parties are able to come to an agreement without government intervention (using the example of compensation of externalities).
The Coase theorem was formulated by J. Stigler, showing that “... under conditions of perfect competition, private and social costs are equal.”
R. Coase leads next example. In the neighborhood there is an agricultural farm and a cattle ranch: the farmer grows wheat, and the herder raises cattle, which from time to time graze the crops on neighboring lands. There is an external effect. However, as R. Coase shows, this problem can be successfully solved without the participation of the state. If the herder is responsible for the damage, there are two options:
1. If there is liability for damage, the herder will pay the farmer for not cultivating the land, or he will lease his land.
2. If there is no liability for damage, the payments will now be made by the grower.
Thus, with zero transaction costs, both the farmer and the herder will have economic incentives to increase the value of production, since each of them will receive their share of the increase in income. However, when taking into account transaction costs desired result may not be achieved. The fact is that the high cost of obtaining the necessary information, conducting negotiations and legal cases can exceed the possible benefits of concluding a deal.
Experimental studies have shown that the Coase theorem is true for a limited number of participants in a transaction (two or three). As the number of participants increases, transaction costs increase sharply and the assumption of their zero value ceases to be correct.
The Coase theorem helps to develop the right strategy in the fight against environmental pollution by balancing the marginal social benefits of control with the marginal social costs necessary for its implementation. The intersection of the marginal social benefit curve MSB with the marginal social cost curve MSC allows us to determine the effective level of harmful emissions for a given society.
Marginal benefits"
and marginal costs
Definition
effective
emission levels
Emission rate (%)
The fact is that as the percentage of polluting emissions decreases, the marginal social costs increase sharply, so each additional percentage reduction costs more and more.
There are three main ways to reduce harmful emissions into the environment:
1. establishing norms or standards for harmful emissions;
2. introduction of fees for emissions;
3. sale of temporary emissions permits.
MORDOVIA STATE UNIVERSITY
named after N.P. Ogareva
“Transaction costs.
Coase's theorem."
Prepared by: Saushkina E.G.
student of group 101
specialty: "accounting"
Checked by: Kerzhemankin D. A.
Saransk 2004
Introduction.
1. Transaction costs.
2. Concept and types of transactions.
3. Transaction costs and their types.
4. Ronald Coase
5. Coase theorem
Conclusion.
Bibliography.
Introduction
In the past, economic theory suffered because it could not clearly formulate its premises. In developing a theory, economists have often shied away from examining the foundations on which it was built. But such examination is essential not only to prevent misinterpretations and unnecessary disputes arising from insufficient knowledge of the initial principles of the theory, but also because of the extreme importance for economic theory of rational judgment in choosing between rival sets theoretical prerequisites.
Perhaps the central section of microeconomic theory is the theory of the firm, which enriched economic science with the concept of transaction costs. The use of this particular concept for the study of economic processes currently appears to be very fruitful. It is the possibility of reducing transaction costs that makes it effective to replace market exchange with internal organization, which explains the existence of firms.
Transaction costs (costs)
The theory of transaction costs is an integral part of a new direction in modern economic science - neo-institutionalism. Its development is primarily associated with the names of two economists - R.Kouza and O. Williamson.
The basic unit of analysis in the theory of transaction costs is an act of economic interaction, a deal, a transaction. The category of transaction is understood extremely broadly and is used to refer to the exchange of both goods and legal obligations, transactions of both a short-term and long-term nature, requiring both detailed documentation and involving a simple mutual understanding of the parties. The costs and losses that may accompany such interaction are called transaction costs.
Transaction costs are the central explanatory category of all neo-institutional analysis. Orthodox neoclassical theory viewed the market as a perfect mechanism where there is no need to take into account the costs of servicing transactions. The key importance for the operation of the economic system of transaction costs was realized thanks to the article by R. Coase “The Nature of the Firm” (1937 .). He showed that in every transaction it is necessary to negotiate, carry out supervision, establish relationships, and resolve disagreements.
Initially, transaction costs were defined by R. Coase as “the costs of using the market mechanism.” Later this concept acquired a broader meaning. It has come to mean any types of costs that accompany the interaction of economic agents, regardless of where it takes place - on the market or within organizations, since business cooperation within hierarchical structures (such as firms) is also not free from friction and losses. According to the most widely accepted definition K. Dalman, transaction costs include the costs of collecting and processing information, conducting negotiations and making decisions, monitoring compliance with contracts and enforcing their implementation. The introduction of the idea of positive transaction costs into scientific circulation was a major theoretical achievement.
2. Concept and types of transactions
The concept of transaction was first introduced into scientific circulation by J. Commons.
A transaction is not an exchange of goods, but the alienation and appropriation of property rights and freedoms created by society. This definition makes sense (Commons) due to the fact that institutions ensure the extension of the will of an individual beyond the area within which he can influence the environment directly through his actions , i.e. beyond the scope of physical control, and therefore turn out to be transactions as distinct from individual behavior as such or the exchange of goods.
Commons distinguished three basic types of transactions:
1) Transaction– serves to carry out the actual alienation and appropriation of property rights and freedoms, and its implementation requires mutual consent of the parties, based on the economic interest of each of them.
2) transaction control– the key in it is the relationship of subordination management, which involves such interaction between people when the right to make decisions belongs to only one party.
3) Transactionation– the asymmetry of the legal status of the parties remains, but the place of the managing party is taken by a collective body that performs the function of specifying rights. Rationing transactions include: drawing up a company budget by the board of directors, the federal budget by the government and approval by a representative body, an arbitration court decision regarding a dispute arising between operating entities through which wealth is distributed. There is no control in the rationing transaction.
Through such a transaction, wealth is allocated to one or another economic agent.
The presence of transaction costs makes certain types of transactions more or less economical depending on the circumstances of time and place. Therefore, the same operations can be mediated by different types of transactions depending on the rules that they order.
Transactions can be simple, for example, buying a bunch of radishes on the market, and complex, for example, implementing an ERP system with the help of external consultants. Complex and responsible agreements are always formalized by contracts.
Any Transaction consists of two parts:
Preparation of an agreement. At this phase, the buyer must find a seller, collect information on prices (ask the price), evaluate the quality, select a seller and come to an agreement with him. The seller must buy a place on the market, undergo quality control of his goods, and continuously collect information on prices. Implementation of the agreement. At this phase, the buyer pays for the product, receives it at his disposal, and evaluates its quality again.
Each Transaction necessarily defines 4 groups of parameters:
Participants in the transaction, Resources used in the transaction and expected results, Rights of participants to resources and results, Responsibilities of the parties.
3. Transaction costs and their types.
Transaction costs are any losses arising from the ineffectiveness of joint decisions, plans, concluded contracts and created structures. Transaction costs limit the possibilities for mutually beneficial cooperation.
Developing Coase's analysis, proponents of the transaction approach proposed various classifications of transaction costs (costs). In accordance with one of them, the following are distinguished:
1. Costs of searching for information. Before a transaction is made, it is necessary to have information about where potential buyers or sellers of consumer goods or production factors can be found and what the current prices are. Costs of this kind consist of the time and resources required to conduct the search, as well as losses associated with the incompleteness and imperfection of the information received.
2. Negotiation costs. The market requires the diversion of significant funds for negotiations on the terms of exchange, for the conclusion and execution of contracts. The more participants in a transaction and the more complex the subject matter, the higher these costs. Losses due to unsuccessfully concluded, poorly executed and unreliably protected agreements are a powerful source of these costs.
3. Measurement costs.Any product or service is a complex of characteristics. When exchanging, only some of them are inevitably taken into account, and the accuracy of their assessment can be extremely approximate. Sometimes the qualities of a product of interest are generally immeasurable and one has to use intuition to evaluate them. The purpose of saving them is determined by such forms of business practices as warranty repairs, branded labels,
4. Costs of specification and protection of property rights. This category includes the costs of maintaining courts, arbitration, government bodies, the time and resources necessary to restore violated rights, as well as losses from their poor specification and unreliable protection.
5. Costs of opportunistic behavior. The term “opportunistic behavior” was introduced by O. Williamson. This is the name of dishonest behavior that violates the terms of the transaction or is aimed at obtaining one-sided benefits to the detriment of the partner. Various cases of lying, deceit, loafing at work, and neglecting one's obligations fall under this heading. There are two main forms of opportunism, the first of which is characteristic of relations within organizations, the second of which is characteristic of market transactions.
Shiking(shirking) is work with less impact and responsibility than it should be under the terms of the contract. When there is no possibility of effective control over an agent, he may begin to act based on his own interests, which do not necessarily coincide with the interests of the company that hired him. The problem becomes especially acute when people work together (“as a team”) and everyone’s personal contribution is very difficult to determine.
Extortion(holding-up) is observed in cases when one of the agents made investments in specific assets. Then his partners have the opportunity to claim part of the income from these assets, threatening otherwise to break off relations (for this purpose, they can begin to insist on revising the price of the product received, improving its quality, increasing the volume of supplies, etc.). The threat of extortion undermines incentives to invest in specific assets.
6. Costs of “politicization”. This general term can be used to denote the costs that accompany decision-making within organizations. If participants are endowed with equal rights, then decisions are made on a collective basis, by voting. If they are located at different levels of the hierarchical ladder, then the superiors unilaterally make decisions that are binding on the subordinates.
4. Ronald Coase
The nineties of the 20th century brought success to economists in the study of the market, property, firms, corporations. A unique synthesis of neoclassicism and institutionalism, “pure” theory and applied developments, macro- and microeconomic analysis was formed. The rapid implementation of theoretical results into practice forces us to repeat the words of one of the outstanding physicists: “There is nothing more practical than a good theory.” The world of economists is talking about a new paradigm of science that can determine both the future of the economy itself and its application in a wide variety of areas of the economy. One of the troublemakers was an American
Ronald Coase (Nobel laureate 1991).
Ronald Coase received his award “for pioneering work on the problems of transaction costs and property rights” at a very advanced age - an 80-year-old professor at the University of Chicago had retired more than 10 years ago. He was born in 1910 in Great Britain and graduated from the London School of Economics. After moving to the USA, he worked at the University of Virginia and the University of Chicago. Coase's works serve as a brilliant refutation of the now seemingly irrefutable opinion that success in economic research can only be achieved by using mathematical methods, constructing multi-factor models. In Coase's works there are no formalized models, mathematical calculations, or even graphs and diagrams. However, they (only three articles published in 1937, 1946 and 1960) revolutionized the vision of economic reality, served as a source of paradigmatic changes in modern economic analysis, and gave rise to a number of rapidly developing scientific concepts.
Coase's ideas were not immediately understood and accepted. The article “The Nature of the Firm,” published in 1937, did not make any impression at the time. The attention of scientists at that time was focused on the macroeconomic theory of Keynes, on works analyzing “market failures” and justifying the inevitability of state regulation of the market system. Coase, in this and subsequent publications, approached the problems of the market, the firm, and the state from a completely different angle. In the end, his ideas began to raise serious objections from many American economists, especially professors at the University of Chicago, who were literally discouraged by the paradoxical approaches and conclusions of not the most eminent of scientists.
It seemed that the generally accepted assumptions, known even to college students, about “market failure,” about the inevitability of government regulation of monopolies, the financing of education, and the solution of environmental problems, were turned on their head. Coase, as he writes, “was forced to present his thoughts more fully.” , publishing the article “The Problem of Social Costs”. Since that time, the theories of “property rights” and “transaction costs” developed by the scientist begin to gain recognition, and what is especially important, their application in practice turns out to be effective.
5. Coase theorem.
An analysis of the problem of social costs led Coase to the conclusion that J. Stigler called “Coase theorem”(Coase theorem). Its essence is that, if the property rights of all parties, carefully defined, and transaction costs are equal to the bullet, the final result (maximizing the value of production) does not depend on changes in the distribution of property rights.
Transaction costs are zero, which means:
Everyone knows everything and learns new things instantly and unambiguously. Everyone understands each other perfectly, that is, words are not needed. Everyone's expectations and interests are always aligned with everyone else. When conditions change, approval occurs instantly. Any opportunistic behavior is excluded. Each product or resource has many substitutes.
Under these conditions, “the initial distribution of property rights does not at all affect the structure of production, since ultimately each of the rights will end up in the hands of the owner who is able to offer the highest price for it based on the most effective use of this right.”
A comparison of a pricing system that includes liability for damage from negative externalities with a pricing system where there is no such liability led R. Coase came to the seemingly paradoxical conclusion that if the participants can agree on their own, and the costs of such negotiations are negligible (transaction costs are zero), then in both cases, under conditions of perfect competition, the maximum possible value of production is achieved.
However, if transaction costs are taken into account, the desired result may not be achieved. The fact is that the high cost of obtaining the necessary information, conducting negotiations and legal cases may exceed the possible benefits of concluding a deal. In addition, when assessing damage, significant differences in consumer preferences cannot be ruled out (for example, one person values the same damage much more than another). To account for these differences, a clause regarding the income effect was later introduced into the formulation of the Coase theorem.
Experimental studies have shown that the Coase theorem is true for a limited number of participants in the transaction (two or three). As the number of participants increases, transaction costs increase sharply and the assumption of their zero value ceases to be correct.
It is interesting to note that the Coase theorem proves the meaning of transaction costs “by contradiction”. In reality, they play a huge role and it is surprising that until recently neoclassical economic theory did not notice them at all.
A huge contribution to the transaction theory was made by: O. Williamson, A. Alchiani, G. Demset, S. Grosman and others.
Conclusion
Transaction cost theorists managed to identify the most important characteristics that determine the essence of a firm. This is the formation of a complex network of contracts, the long-term nature of business relationships, production by a single “team”, investment in specific assets, an administrative mechanism for coordination through orders. All explanations that developed the ideas of R. Coase were based on the general idea of the company as a tool for saving transaction costs .
According to the theory of transaction costs, this key principle explains not only the very fact of the existence of firms, but also many particular aspects of their functioning - financial structure, forms of management, organization of the labor process, etc. The fruitfulness of this approach was confirmed in the study of hybrid organizational forms, intermediate between market and firm, such as franchising. He contributed to a radical revision of ideas in the field of antitrust regulation, demonstrating that many atypical forms of business practice are explained not by the pursuit of monopoly advantages, but by the desire to save transaction costs.
The theory of transaction costs has become widespread in our country. Modern representatives of which are Malakhov S., Kokorev V., Barsukova S.Yu., Shastiko A.E., Kapelyushnikov R.I. and etc.
For example, Malakhov examines the role of transaction costs in the Russian economy. Kokore analyzes their dynamics. Barsukova highlights transaction costs in small businesses.
Thanks to the transactional approach, modern economic theory has acquired greater realism, having discovered a wide range of phenomena in business life that were previously completely out of its field of vision.
Bibliography.
1. Borisov E.F. Economic theory. M.: YURAYT, 2002
2. Valovoy D.V. Political Economy. M.: Prospekt, 1999
3. Dobrynina A.I., Tarasevich L.S. Economic theory. M.: 2001
4. Barsukova S.Yu. Transaction costs of entering the market of small businesses // Problems of forecasting. - 2000. - No. 1.
5. Kamaev V.D. Economic theory. Moscow UNITY, 2002
6. Mugalimov M.G. Basics of economic theory. LLC "Interpressservice", UE "EKOPERSPECTIVA", Minsk, 2002
7. Malakhov S. Transaction costs in the Russian economy //
Economic Issues - 1997.- No. 7
8. Malakhov S. Transaction costs and macroeconomic equilibrium
// Economic Issues. – 1998.-№11.
9. Kokorev V. Institutional transformations in modern Russia:
analysis of the dynamics of transaction costs // Questions of Economics. - 1996.-
10. ise.openlab.spb.ru
MORDOVIA STATE UNIVERSITY
named after N.P. Ogareva
“Transaction costs.
Coase's theorem."
Prepared by: Saushkina E.G.
student of group 101
specialty: "accounting"
Checked by: Kerzhemankin D. A.
Saransk 2004
Introduction.
1. Transaction costs.
2. Concept and types of transactions.
3. Transaction costs and their types.
4. Ronald Coase
5. Coase theorem
Conclusion.
Bibliography.
Introduction
In the past, economic theory suffered because it could not clearly formulate its premises. While developing the theory, economists often avoided examining the foundations on which it was built. But such research is essential not only to prevent false interpretations and unnecessary disputes that arise from insufficient knowledge of the initial principles of the theory, but also because of the extreme importance for economic theory of rational judgment in choosing between competing sets of theoretical premises.
Perhaps the central section of microeconomic theory is the theory of the firm, which enriched economic science with the concept of transaction costs. The use of this particular concept for the study of economic processes currently appears to be very fruitful. It is the possibility of reducing transaction costs that makes it effective to replace market exchange with internal organization, which explains the existence of firms.
Transaction costs (costs)
The theory of transaction costs is an integral part of a new direction in modern economic science - neo-institutionalism. Its development is primarily associated with the names of two economists - R. Coase and O. Williamson.
The basic unit of analysis in the theory of transaction costs is an act of economic interaction, a deal, a transaction. The category of transaction is understood extremely broadly and is used to refer to the exchange of both goods and legal obligations, transactions of both a short-term and long-term nature, requiring both detailed documentation and involving a simple mutual understanding of the parties. The costs and losses that may accompany such interaction are called transaction costs.
Transaction costs are the central explanatory category of all neoinstitutional analysis. Orthodox neoclassical theory viewed the market as a perfect mechanism where there is no need to take into account the costs of servicing transactions. The key importance for the operation of the economic system of transaction costs was realized thanks to the article by R. Coase “The Nature of the Firm” (1937). He showed that in every transaction it is necessary to negotiate, supervise, establish relationships, and resolve disagreements.
Initially, transaction costs were defined by R. Coase as “the costs of using the market mechanism.” Later this concept acquired a broader meaning. It has come to mean any types of costs that accompany the interaction of economic agents, regardless of where it takes place - on the market or within organizations, since business cooperation within hierarchical structures (such as firms) is also not free from friction and losses. According to the most widely recognized definition by K. Dahlman, transaction costs include the costs of collecting and processing information, conducting negotiations and making decisions, monitoring compliance with contracts and enforcing their implementation. The introduction of the idea of positive transaction costs into scientific circulation was a major theoretical achievement.
Concept and types of transactions
The concept of transaction was first introduced into scientific circulation by J. Commons.
A transaction is not an exchange of goods, but an alienation and appropriation of property rights and freedoms created by society. This definition makes sense (Commons) due to the fact that institutions ensure the extension of the will of an individual beyond the area within which he can influence the environment directly through his actions, i.e., beyond physical control, and therefore turn out to be transactions in differences from individual behavior as such or the exchange of goods.
Commons distinguished three main types of transactions:
1) Deal transaction– serves to implement the actual alienation and appropriation of property rights and freedoms, and its implementation requires mutual consent of the parties, based on the economic interest of each of them.
2) Control transaction– the key in it is the relationship of management of subordination, which involves such interaction between people when the right to make decisions belongs to only one party.
3) Rationing transaction– it preserves the asymmetry of the legal status of the parties, but the place of the managing party is taken by a collective body that performs the function of specifying rights. Rationing transactions include: drawing up a company budget by the board of directors, the federal budget by the government and approval by a representative body, an arbitration court decision regarding a dispute arising between existing entities through which wealth is distributed. There is no control in the rationing transaction.
Through such a transaction, wealth is allocated to one or another economic agent.
The presence of transaction costs makes certain types of transactions more or less economical depending on the circumstances of time and place. Therefore, the same operations can be mediated by different types of transactions depending on the rules that they order.
Transactions can be simple, for example, buying a bunch of radishes on the market, or complex, for example, implementing an ERP system with the help of external consultants. Complex and responsible agreements are always formalized by contracts.
Any Transaction consists of two parts:
- Preparation of an agreement. At this phase, the buyer must find a seller, collect information on prices (ask the price), evaluate the quality, select a seller and come to an agreement with him. The seller must buy a place on the market, undergo quality control of his goods, and continuously collect information on prices.
- Implementation of the agreement. At this phase, the buyer pays for the product, receives it at his disposal, and evaluates its quality again.
Each Transaction necessarily defines 4 groups of parameters:
- Transaction participants
- The resources used in the transaction and the expected results,
- The rights of participants to resources and results,
- Duties of the parties.
3. Transaction costs and their types.
Transaction costs are any losses arising from the ineffectiveness of joint decisions, plans, concluded contracts and created structures. Transaction costs limit the possibilities for mutually beneficial cooperation.
Developing Coase's analysis, supporters of the transaction approach proposed various classifications of transaction costs (costs). In accordance with one of them, the following are distinguished:
1. Costs of searching for information. Before a transaction is made, it is necessary to have information about where potential buyers or sellers of consumer goods or production factors can be found and what the current prices are. Costs of this kind consist of the time and resources required to conduct the search, as well as losses associated with the incompleteness and imperfection of the information received.
2. Negotiation costs. The market requires the diversion of significant funds for negotiations on the terms of exchange, for the conclusion and execution of contracts. The more participants in the transaction and the more complex the subject matter, the higher these costs. Losses due to poorly concluded, poorly executed and unreliably protected agreements are a powerful source of these costs.
3. Measurement costs. Any product or service is a set of characteristics. When exchanging, only a few of them are inevitably taken into account, and the accuracy of their assessment can be extremely approximate. Sometimes the qualities of a product of interest are generally immeasurable and one has to use intuition to evaluate them. The purpose of their savings is determined by such forms of business practice as warranty repairs, branded labels,
4. Costs of specification and protection of property rights. This category includes the costs of maintaining courts, arbitration, government bodies, the time and resources required to restore violated rights, as well as losses from their poor specification and unreliable protection.
5. Costs of opportunistic behavior. The term "opportunistic behavior" was introduced by O. Williamson. This is the name of dishonest behavior that violates the terms of the transaction or is aimed at obtaining unilateral benefits to the detriment of the partner. Various cases of lying, deceit, loafing at work, and neglecting one’s obligations fall under this heading. There are two main forms of opportunism, the first of which is characteristic of relations within organizations, and the second of market transactions.
Shiking(shirking) is work with less impact and responsibility than it should be under the terms of the contract. When there is no possibility of effective control over an agent, he may begin to act based on his own interests, which do not necessarily coincide with the interests of the company that hired him. The problem becomes especially acute when people work together (as a "team") and each person's personal contribution is very difficult to determine.
10.3. Transaction costs and the Coase theorem
Transactional, or transaction costs, are the costs in the sphere of exchange associated with the transfer of property rights. The category of transaction costs was introduced into economics in the 30s Ronald Coase and has now become widespread. Usually isolated five main forms of transaction costs:
information search costs related to information asymmetry, search for producers or consumers;
costs of negotiations and contracts;
measurement costs(errors are possible);
costs of specification and protection of property rights(especially if there is no reliable protection);
costs of opportunistic behavior, since the behavior of the parties after the conclusion of the contract is difficult to predict.
Transaction costs arise before the exchange process, during the exchange process, and after it. The deepening division of labor and the development of specialization contribute to the growth of transaction costs. Their size also depends on the form of ownership dominant in society.
Coase theorem. R. Coase's theorem states: if the property rights of all parties are determined and transaction costs are equal to zero, then the final result, which maximizes the value of production, does not depend on changes in the distribution of property rights.
The Coase theorem shows that, under conditions of guarantee of private property, the parties are able to come to an agreement without government intervention (using the example of compensation of externalities). Formulated the theorem J. Stigler, showing that “...in conditions of perfect competition, private and social costs are equal.” Experimental studies have shown that the theorem is true for a limited number of participants in the transaction (two to three). As the number of participants increases, transaction costs increase sharply and the assumption of their zero value ceases to be correct.
10.4. Asymmetry of market information
Previously, it was assumed that consumers and producers have complete information about the economic variables relevant to their choices. Now let's see what happens if some participants know more than others, i.e. in the case of asymmetric information.
Asymmetric information typical for many business situations. Typically, the seller of a product knows more about its quality than the buyer. Workers know their skills and abilities better than entrepreneurs. And managers know their capabilities better than business owners.
Asymmetric information explains many of the institutional rules in our society. This concept helps explain why car companies offer warranties and services for new models; why firms and workers enter into contracts that provide incentives and bonuses; why corporate shareholders need to monitor the behavior of managers.
Uncertainty of quality and the market for “lemons”. Imagine what you have purchased new car for $10,000, drove it 100 miles, and then suddenly realized you didn't really need it. Nothing happened to the car - it worked perfectly and met all your expectations. You just felt like you could do just as well without it and would benefit more if you saved the money for other things. So you decide to sell this car. What kind of revenue could you expect for it? Probably no more than $8,000, even if the car is new, has only 100 miles on it, and you have the paperwork to transfer it to someone else. Apparently, if you put yourself in the shoes of the prospective buyer, you yourself would not pay more than $8,000 for it. Why does the mere fact of selling a car second hand reduce its value so significantly? To answer this question, think about your own doubts as a potential buyer. Why, you might be surprised, is this car for sale? Has the owner really changed his mind or is there something wrong with the car? It is possible that this car will turn out to be a “lemon”.
Used cars are sold significantly cheaper than new ones because information about their quality is asymmetrical: the seller of such a car knows much more about it than the potential buyer. A buyer may hire a mechanic to check the car, but a seller who has experience with it will still know better. In addition, the very fact of selling this car confirms that it may actually turn out to be a “lemon”, otherwise why would you sell a reliable car for? As a result, a potential buyer of a used car will always have suspicions about its quality, and with good reason.
The importance of asymmetric information about product quality was analyzed for the first time George Akerlof. Akerlof's analysis extends far beyond the used car market. Markets for insurance, credit, and even labor are also characterized by asymmetric quality information. To understand its implications, we'll start with the used car market and then see how the same principles apply to other markets.
Suppose there are two types of used cars - high quality and low quality. Let us also assume that both sellers and buyers can determine the type of car. In Fig. 10.4.1. S H there is a supply curve for high quality cars, a D H is the demand curve for them. Likewise S L and D L– supply and demand curves for low-quality cars. notice, that S H higher than S L, since owners of high-quality cars are less willing to part with them and should receive a higher price for it. Likewise D H higher D L since buyers are willing to pay more for good quality. As can be seen from the figure, the market price of high-quality cars is $10,000, low-quality cars are $5,000, and 50,000 copies of each type are sold.
Rice. 10.4.1. The Lemons Problem
In reality, the seller of a used car knows much more about its quality than the buyer. Let's see what happens if sellers are well aware of the quality of cars, but buyers know nothing about it at all. (The latter become familiar with the quality of cars only after they have been purchased and driven for some time.) Initially, buyers might believe that the chances of buying a car good quality equal to 50%. (With mutual knowledge of quality between sellers and buyers, 50,000 of each type are sold.) Thus, when making a purchase, they consider all cars to be of “average” quality. (Of course, after buying a car, buyers will determine its true quality.) The demand for cars of average quality, indicated as D M below D H , but higher D L. As the figure shows, fewer high-quality cars (25,000) and more low-quality cars (75,000) will now be sold.
Once consumers begin to realize that the majority of cars sold (about 3/4 total number) of poor quality, their demand shifts. As shown, the new demand curve could be D L.M., which means that on average the quality of cars is below the intermediate level. However, then the total number of cars shifts even closer to low quality. As a result, the demand curve moves further to the left, moving towards a lower level of quality. These shifts lead to the fact that only low-quality cars are sold. The market price is too low to allow high quality cars to be sold, so consumers correctly assume that any car they buy is of poor quality, and the demand curve coincides with D L .
The situation presented in Fig. 10.4.1., is extreme. The market can reach equilibrium at a price that ensures the sale of some part of high-quality cars. But this part will obviously be lower than if consumers knew the qualities of the cars at the time of purchase. That's why I should expect to sell my car, new model and in excellent condition, for much less than what I paid for it. Due to information asymmetry, low-quality goods drive high-quality goods out of the market.
Our example of used cars shows how asymmetric information can lead to market failure. In an ideal world of perfect markets, consumers would be able to choose between low- and high-quality cars. Some would choose the former because they are cheap, others would prefer to pay more for the latter. Unfortunately, in the real world, consumers have a hard time determining the quality of used cars at the time of purchase, so their prices drop and high-quality cars disappear from the market.
Market signals. Asymmetric information in some cases leads to the “lemons” problem. Since sellers know more about the quality of goods than buyers, the latter may assume that it is low, and therefore prices fall, and only low-quality goods are sold. We have also seen how government intervention (for example, in the health insurance market) or reputational maintenance (for example, in the service sector) can help partially solve this problem. Now we will look at another, no less important mechanism that allows sellers and buyers to overcome information asymmetry - market signals. The concept of market signals was first developed Michael Spence, which showed that in some markets sellers provide buyers with some kind of signals expressing information about the quality of goods.
To understand how market signals work, consider the labor market, which is good example market with information asymmetry. Let's say a company intends to hire two people. These two workers (sellers of labor) know much more about the quality of their labor than the firm (buyer of labor).
For example, they imagine how difficult it is for them to do the job, to what extent they are trustworthy, what their skills are, etc. The company will be able to find out all this only after hiring and some period of their work. At the time of hiring, both workers are no different from everyone else, and the company knows little about their performance.
Why don't firms simply hire workers first, then watch how they work, and fire those who are unproductive? Because it is often very expensive. First, in many countries and in many institutions in the United States, it is difficult to fire someone who has worked for more than a few months. (The firm is required to show cause or pay severance.) Second, workers in many occupations may not reach their capacity limits for at least the first six months. Workers may need to be trained. The company must allocate significant amounts of investment for these purposes, so it may not identify the abilities of employees during the year. So firms would be much better off if they knew the productivity of potential workers before hiring.
What characteristics of employee productivity can a company obtain before hiring? Can potential employees provide this information? A good impression during an interview could provide some information, but even unhardworking people sometimes know how to present themselves in the right way to get a job. Thus, external impressions provide an insignificant signal—they are of little help in distinguishing between high performers and low performers. For a signal to be meaningful, it must be easier to give to high performers than to low performers.
For example, education is a significant signal in the labor market. An individual's level of education can be measured by several parameters - number of years of education, degree obtained, reputation of the university or college that awarded the degree, grade point average, etc.
Of course, education can directly or indirectly improve a person's abilities: he gains information, skills and general knowledge that are useful in work. But even if education did not contribute to this, it nevertheless remains an important signal of a worker's effectiveness, because a more capable person has an easier time achieving a high level of education. (Capable people tend to be more intelligent, focused, energetic, and hardworking—traits that are also useful in learning.) Consequently, more capable people rather, they can receive a good education, which serves as a signal to firms about the capabilities of workers, and thus count on high-paying jobs. And firms rightly view education as a signal of efficiency.
If an agent is fully insured and cannot be closely monitored by an insurance company with limited information, then his behavior may change after the policy is purchased. The problem of moral burden arises. The latter occurs when the insured party can influence the likelihood or significance of the event that causes the payment. For example, if I have comprehensive health insurance, I will be able to visit the doctor more often than with a limited contract. If the insurance company is able to observe the behavior of its client, then it can charge higher fees to those who make more claims. But if the company does not have this option, its payout will likely be higher than expected. Under the influence of moral pressure, insurance companies are forced to increase insurance premiums or refuse to enter into such transactions altogether.Consider, for example, the decisions made by the owners of a $100,000 wholesale store and their insurance company. Suppose that by implementing a fire safety program costing $50, the owners provide a probability of fire occurrence equal to 0.005. Without such a program, the probability increases to 0.01. Knowing this, the insurance company faces a dilemma if it is unable to monitor the implementation of the program. The policy offered by it cannot include the provision that insurance will be paid only if the fire safety program is completed. If implemented, the company could insure the wholesale store for a premium equal to the expected fire losses of $500 ($0.005 - $100,000). When the insurance policy is sold, the owners have no incentive to implement the program: if an accident occurs, their financial loss will be fully compensated. Thus, by selling a policy for $500, the insurance company suffers a loss because the expected loss from the fire is $1,000 ($0.01 - $100,000).
The problem of moral burden arises because those seeking insurance can influence the degree of risk in a particular situation of uncertainty. Unfortunately, this problem is not limited to insurance companies. Moral pressure also affects the ability of markets to allocate resources efficiently. Let, for example, D in Fig. 10.4.2. denotes the demand for road transport in miles per week. The demand curve is downward sloping as many consumers switch to alternative means of transportation as the cost of automobile transportation rises. Let us first assume that transportation costs include the cost of insurance and that insurance companies can accurately estimate the risk of a traffic accident. In this case, there is no moral burden. Drivers know that insurance premiums for more dangerous types of transportation will be increased (regardless of whether an accident occurs or not), and in turn increase overall transportation costs (costs per mile are considered constant). For example, if shipping costs are $1.50 per mile (of which 50 cents is for insurance), then the driver decides to drive 100 miles per week.
Now suppose that the insurance premium does not depend on the habits of individual drivers, which raises the problem of moral burden. At the same time, drivers believe that any additional costs caused by accidents are distributed over a large group and only a small share falls on each individual. They will act as if the insurance premium does not depend on the number of miles traveled. Then an additional mile of transportation would cost $1.00 rather than $1.50, and the number of miles traveled would increase substantially, from 100 to 140.
This example illustrates a general principle: by lowering the price people pay for services, moral pressure forces them to demand more than the efficient level for those services.
Rice. 10.4.2. Effects of moral stress
In response to the moral burden problem, half of the states have modified warranty rules to require sellers to disclose illness to buyers at the time of sale. Some states also require compliance with local and federal animal health regulations. In addition, guarantees of the absence of diseases must be given in the form of written or oral guarantees.
P The customer-agent problem. If information were publicly available and if monitoring worker productivity was costless, business owners could ensure that their managers and workers were operating efficiently. However, in most firms, owners are not able to exercise complete control - employees are better informed than they are. This information asymmetry leads to the customer-agent problem.
Relationships of this type arise whenever an employment transaction makes the welfare of one person dependent on the activities of another. The agent is the party taking the action, and the principal is the party that is affected by the action. In our example, managers and workers are agents, and owners are customers. The problem of the customer-agent is that managers can pursue their own goals, which can be achieved even at the expense of reducing the owners’ profits.
Relationships of this kind are common in our society. For example, doctors are agents for hospitals and, as agents, can select patients and perform procedures that suit their own preferences rather than the goals of the hospital. Likewise, property managers who are agents for the property owners may not maintain the property in the way the property owners want.
How do incomplete information and costly monitoring affect agents' actions? And what is the mechanism that encourages managers to work in the interests of owners? These are central questions in any study of the customer-agent problem. In this paragraph we look at it from several points of view. First, we will focus on the problem of the owner-manager in private and public enterprises.
Second, we discuss how owners can use the contract-for-hire relationship to solve client-agent problems.
Individuals or financial institutions have stakes greater than 10% in only 16 of the 100 largest industrial corporations. Obviously, the largest firms are managed by managers. The fact that most shareholders own only a small percentage of the firm's total capital makes it difficult for them to obtain information about the performance of managers. One of the functions of owners (or their representatives) is to monitor the behavior of managers. But such monitoring requires costs for collecting and processing information, which is not cheap, at least for an individual.
Thus, managers of private corporations can pursue their own goals. But what are these goals? According to one view, managers are essentially more concerned with production growth than with profits; faster growth and greater market share provide greater cash flows, which in turn make managers feel confident about it. Another view shifts the emphasis from growth to the utility that managers receive from their activities, referring not so much to profits as to prestige, power over the corporation, fringe benefits and other benefits, and long tenure.
There are, however, some important factors that limit the ability of managers to deviate from owners' goals. First, stockholders may express dissatisfaction if they feel that managers are behaving inappropriately, and in exceptional cases they may replace current management (perhaps with the help of the corporation's board of directors, whose responsibility is to monitor the behavior of managers). Secondly, strong market principles can develop in corporate management. If, due to poor management of the company, it becomes possible for control to pass into the hands of the owners, then managers have a serious incentive to maximize profits. Third, there may be a well-developed market for managers. If those who maximize profits are in demand, they will receive high salaries, which in turn will encourage other managers to pursue the same goal.
Unfortunately, the means shareholders have to control the behavior of managers are limited and imperfect. Changes in corporate leadership may be dictated, for example, by considerations of personal power rather than economic efficiency. The market for managers can also be inefficient because top-level managers are often near retirement age and have long-term contracts. Therefore, it is important to find solutions to the customer-agent problem so that owners can choose incentives for managers without turning to government authorities for help. Let's look at some of these solutions in the following example.