18-Corporate and Political Governance

  1. Principal-agent problem[In politics-Citizens are principals and politicians are agents][In corporate world- share holders are principals and top executives are the agents]
    1. Principals want someone(agent) to do something on their behalf and typically it involves the principals having imperfect information as they don’t usually know if the agent is working hard or efficiently
    2. In the corporate or political realm this usually involves many principals and few agents
      1. Principals will generally not want to bother with monitoring the agents and try to leave it to others, but;
      2. Most times the agents wont be monitored or insufficiently monitored
  2. Large firms have separation of ownership and control, meaning they are owned by shareholders but controlled by top managers
    1. 1932 book “the modern corporation and private property” identified an immense gap between ownership and control
    2. Watchmen
      1. Elect board of directors: problem is the top executives usually pick the candidates. Also the job is part-time
      2. Auditors: great idea but they may not be too aggressive as the are employed by the company
      3. Large outside investors(funds)- may not act quickly or at all as they can become complacent
      4. Analysts- will they get access to companies if they become aggressive?
    3. Takeovers and mergers could reform, but sometimes the offending company can buy a smaller company with good management and build an empire
    4. Stock options for top executives are touted as a way of aligning the incentives of top executives with their shareholders
    5. Sarbanes-Oxley act: set new rules for appointing and governing the board of directors, however the separation of accountability still exists
  3. Should Gov’t act, is not so straight forward as these are temporary holders of office who’s primary purpose is to get re-elected which, of course, is not always in the best interest of the public
    1. Also many people don’t vote, as a strictly rational person may feel his vote doesn’t really count
    2. Lobbyists are numerically small but well organized and tend to have direct access to an official. The lobbyist can make an offer that would benefit the politician personally but maybe not be so good for the public at large
    3. Pork barrel spending projects benefit a certain area but is paid with federal dollars(log-rolling occurs when two or more politicians agree to support each others project)
    4. Multiple choices? Majority vote can have a hard time choosing the best outcome(ex. 1992 general election where Bush and Perot split republican vote and Clinton cruises to victory)
    5. In the private sector, if a business cant sell product they go out of business but in the political world this is not true
  4. Markets are imperfect and so is Gov’t
    1. Markets are extraordinarily useful
    2. But, they can also produce unwanted results
    3. Gov’t can reduce problems of markets but can also make matters worse
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