Agency Cost & Corporate Governance
Agency Costs and Corporate Governance
I Introduction
Before analysing problems that occur when institutional ownership and control are separated, it should be outlined why institutions exist at all. Therefore, chapter two examines why organizations occur in economy. Chapter three addresses the agency problem, based on this organization. Chapter four addresses the common ways to solve the agency problem and chapter five gives a comparison over the three most important corporate governance systems, namely the US, the German and the Japanese one.
II "Why is there any Organization?"
The basic question that has to be addressed is: "Why is there any organization?" This question was first addressed in a satisfyingly way by Ronald Harry Coase in his 1937 published paper "The Nature of the Firm". He was given the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for this pioneering work in 1991.
II.1 Transaction Costs
As economic theory suggests, outside the firm the price movement directs production, which is therefore coordinated through a series of exchange transactions on the market. Inside the firm this market transactions are eliminated and substituted through the entrepreneur who is coordinating the production. However, all production could be carried out without organizations only through the price mechanism. The ultimate question is if there are reasons possible for the need of organizations and therefore for the existence of firms (Coase, 1937, p. 19).
The reasons for the establishment of firms are based on the fact that there are costs of using the price mechanism. The so called "transaction costs". Possible types of these transaction costs are, among others, deciding what the relevant prices are to be able to make use of the price mechanism or the costs of negotiation and concluding a contract for each transaction, which takes place on a market. Transactions costs also occur, in another way, because the same exchange
I Introduction
Before analysing problems that occur when institutional ownership and control are separated, it should be outlined why institutions exist at all. Therefore, chapter two examines why organizations occur in economy. Chapter three addresses the agency problem, based on this organization. Chapter four addresses the common ways to solve the agency problem and chapter five gives a comparison over the three most important corporate governance systems, namely the US, the German and the Japanese one.
II "Why is there any Organization?"
The basic question that has to be addressed is: "Why is there any organization?" This question was first addressed in a satisfyingly way by Ronald Harry Coase in his 1937 published paper "The Nature of the Firm". He was given the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for this pioneering work in 1991.
II.1 Transaction Costs
As economic theory suggests, outside the firm the price movement directs production, which is therefore coordinated through a series of exchange transactions on the market. Inside the firm this market transactions are eliminated and substituted through the entrepreneur who is coordinating the production. However, all production could be carried out without organizations only through the price mechanism. The ultimate question is if there are reasons possible for the need of organizations and therefore for the existence of firms (Coase, 1937, p. 19).
The reasons for the establishment of firms are based on the fact that there are costs of using the price mechanism. The so called "transaction costs". Possible types of these transaction costs are, among others, deciding what the relevant prices are to be able to make use of the price mechanism or the costs of negotiation and concluding a contract for each transaction, which takes place on a market. Transactions costs also occur, in another way, because the same exchange