Theoretical Perspective Of Principal Agent Theory

Theoretical Perspective Of Principal Agent Theory According to Random House Dictionary, theory is a coherent group of general propositions used as principles of explanation for a class of phenomena. In the formal meanings of the term, theory has the following three meanings (Frederickson and Smith, 2003): Theory in the natural sciences is the rigorous testing of predictive theorems or assumptions using observable and comparable data. The tested and verified hypotheses constitute the foundation of theories. And theories derived from this process usually serve as a highly reliable direction for behavior. Theories in the social sciences, including public administration, implies the sequence of factual material (history, events, cases, stories, measures of opinion, observations) presented in definitions, concepts, and metaphors to promote understanding. The rigorous and the intuitive observation of social behavior, patterns of communication, and culture is the basis to this theory. The last meaning of theory in public administration is the theories of what should to be. These theories compose the bridge between public administration, political science, and philosophy. The theorists aim at discovering theories that account for, explain, or describe observable trends in behavior and to evaluate the normative cues of such behavior. It is often true that public administration theorists use a mix of the second and third definition of theory. And there is no doubt that theory is the bedrock of understanding of public administration (Frederickson and Smith, 2003). If manuscripts contain no theory, their value is suspect (Whetten, 2000). Hence, an important mission of scholars and educators in the areas of management, health, education, and social work is, on the one hand to conduct researches that contribute knowledge to a scientific discipline, and to apply that knowledge to the practice of management as a profession, on the other (Simon, 1967). To do this well, we need to design our research so that it provides an intimate understanding of the practical problems facing the profession. Equally important, we need to appreciate and strengthen our skills in developing good theory so that research conducted about these problems will advance the knowledge that is relevant to both the discipline and the profession (Van DE Ven, 1989). Therefore, this paper aims at discussing what is theoretical from the perspective of principal-agent theory. It is consisted of four sections: 1) What is Principal-Agent Theory; 2) Whats the theoretical contribution of Principal-Agent Theory; 3) Limitations of Principal-Agent Theory; 4) Conclusion. Principal-Agent Theory One day Deng Xiaoping decided to take his grandson to visit Mao. Call me granduncle, Mao offered warmly. Oh, I certainly couldnt do that, Chairman Mao, the awe-struck child replied. Why dont you give him an apple? suggested Deng. No sooner had Mao done so than the boy happily chirped, Oh thank you, Granduncle. You see, said Deng, what incentives can achieve. (Capitalism, 1984) According to Arrow (1971) and Wilson (1968), during the 1960s and early 1970s, economists investigated risk sharing among individuals or groups. The risk-sharing problem, described in this literature, arises when collaborating parties have different standpoints toward risk. Principal-Agent theory expanded the risk-sharing literature to include what is called agency problem. And agency problem occurs when cooperating parties have different goals, information, and division of labor (Jensen Meckling, 1976). Specifically, principal-agent theory concentrates on the ubiquitous agency-relationship, in which one party (the principal) delegates work to another (the agent), who performs that work in behalf of the principal (Eisenhardt, 1989). And principal-agent theory seeks to portray this relationship using the metaphor of a contract (Jensen Meckling, 1976). As a consequence, the central dilemma explored by principal agent theorists is how to stimulate the employee or contractor (agent) to behave in the best interests of the principal (the employer) when the employee or contractor has an informational advantage over the principal and has different interests from the principal. From the agency perspective, most organizations are simply legal fictions which serve as a nexus for a set of contracting relationships among individuals (Jensen and Meckling, 1976). The basic premise of the theory is that if both parties to the relationship are utility maximisers, there is good reason to believe that the agent will not always act in the best interests of the principal (Jensen and Meckling, 1976). In determining the most efficient contract, principal-agent theory brings up certain hypotheses about people, organizations and information. It assumes that agents and principals will act in their self-interest to maximize their own welfare. Agents possess more information than their principals possess. As a result, it identifies two impediments to effective contractual performance: moral hazard and adverse selection. Moral hazard refers to that the agent doesnt put agreed-upon efforts to the tasks. That is, the agent is shirking. Adverse selection refers to the misrepresentation of ability by the agent (Eisenhardt, 1989). The agent may claim to have certain skills, experiences, or capabilities when he or she is hired. Adverse selection arises because the principal cannot completely verify these skills, experiences, or capabilities either at the time of recruitment or while the agent is working (Eisenhardt, 1989). Two types of problems are especially relevant. One is the agency problem which arises from the conflicting goals of the principal and the agent and from the difficulty/expense involved in verifying the agents behavior (Eisenhardt, 1989). The second is the problem of risk-sharing which arises from the different attitudes toward risk on the part of the principal and the agent. The different risk preferences between the principals and agents are likely to lead to different actions. Therefore, the theory concentrates on the contract between the principal and the agent and the ways in which the contract can be made most efficient from the point of view of the principal (V. Nilakant, 1994). Besides, the theory makes two assumptions: that goal conflict exists between principals and agents and that agents have more information than their principals, which results in an information asymmetry between them (Waterman and Meier, 1998). Goal Conflict. In the marketplace, principals and agents clearly have different goals and/or preferences (Waterman and Meier, 1998). Commonly, agents want to make as much money as possible, however principals want to pay as little as possible for services. The same as in the public sector. The government wants to produce as more public goods as possible, while the contractor agents expect to decrease the cost as much as possible. Therefore, in a contract relationship, maximum principals interest couldnt inevitably contribute to the maximum of agents interests. It could even reversely worsen agents advantages, such as less compensation or profit. As a consequence, how to encourage agents to accomplish principals goals at a minimum cost has become a great challenge. Information Asymmetry. As we already have noted, the information asymmetry is a critical assumption of the principal-agent model. The information asymmetry is simply the claim that agents possess more information than their principals possess. (Waterman and Meier, 1998) When the distribution of information between principal and agent is asymmetric, the classic principal-agent problem arises. The problem brought up here is how to avoid information asymmetry so that principals know to what extent the agents have achieved the principals goals, what agents are doing, and what are not done. With these information, principals could better monitor the contract relation and working process to improve organizational performance. In addition to the assumption that partial goal conflict is inherent in any principal-agent relationship, principal-agent theory also presumes that information about the agent is a commodity that can be purchased. (V. Nilakant, 1994) Table 1 presents an overview of principal-agent theory, including key idea, unit of analysis, human assumptions, organizational assumptions, information assumptions, and contracting problems. Table 1 Principal-Agent Theory Overview Key Idea Principal-agent relationships should reflect efficient organization of information and risk-bearing costs Unit of Analysis Contract between principal and agent Human Assumptions Self-interest Bounded rationality Risk aversion Organizational Assumptions Partial goal conflict among participants Efficiency as the effectiveness criterion Information asymmetry between principal and agent Information Assumptions Information as a purchasable commodity Contracting Problems Agency (moral hazard and adverse selection) Risk sharing Problem Domain Relationships in which the principal and agent have partly differing goals and risk preferences (e.g., compensation, regulation, leadership, impression management, whistle-blowing, vertical integration, transfer pricing) Source: Eisenhardt, Kathleen M. (1989). Agency Theory: An Assessment and Review. The Academy of Management Review, Vol. 14, No. 1, p.59 Theoretical Contribution of Principal-Agent Theory Principal-Agent theory has been contributing a lot to organization theory and incentive theory. Principal-Agent theory has been the basis for an extensive set of studies relating bureaucracy to elected officials. It also has been extended to presidents decisions to use force and to the Supreme Court and its relationship to lower courts. (Waterman and Meier, 1998) Before discussing the theoretical contribution of principal-agent theory, Id like to talk about what is a good theory. Above all, a good theory is the theory appropriately used. All theories are false. They are, after all, just words and symbols on pieces of paper, about the reality they purport to describe; they are not that reality. So they simplify it. This means we must choose our theories according to how useful they are, not how true they are. (Mintzberg, 2005) Obviously, principal-agent theory is not omnipotent to explain or solve all problems in an organization. It is true only when it is appropriately used. Furthermore, a good theory is practical precisely. A theory to be useful, should accurately describe or depict a real world event or phenomenon. (Frederickson and Smith, 2003) The first section has demonstrated that principal-agent theory fits this requirement. Scholars devoted to this theory have explicitly described what principal-agent is and what it could explain in the real world. Finally, a good theory is insightful and predictive. Theory is insightful when it surprises, when it allows us to see profoundly, imaginatively, unconventionally into phenomena we thought we understoodà ¢Ã¢â€š ¬Ã‚ ¦theory is of no use unless it initially surprises-that is, changes perceptions. (Mintzberg, 2005) From this perspective, principal-Agent theory may not dramatically change perceptions, but it really brings in some new thinking about organizations and incentives. Firstly, Principal-Agent theory reestablishes the importance of incentives and self-interest in organizational thinking. It reminds us that much of organizational life, whether we like it or not, is based on self-interest. (Eisenhardt, 1989) Both principal and agent are usually assumed to be attempting to maximize their own utilities. Agents would not voluntarily produce desires of principal and it is difficult or expensive for the principal to investigate what the agent is actually doing. Hence, it is significant for principals to provide incentives to agents which lead to an alignment of goals between principal and agent, in order to assure that the agents act for principals aims. That is to maximize principals interests rather than impair principals efficiency through agents over possession of information. Secondly, Principal-Agent theory also makes important contributions to organizational thinking, the most important of which is the treatment of information. (Eisenhardt, 1989). In principal-agent theory, information is considered as merchandise: it has a cost, and it can be exchanged and purchased. The implication is that organizations can invest in information systems in order to control agent opportunism, an illustration of which is the executive compensation. And one of the important factors such compensation requires is information systems. It is assumed that richer information systems control managerial opportunism and, therefore, lead to less performance-contingent pay. Board of directors is considered as one particular relevant information system to monitor executive behaviors. When boards provide richer information, compensation is less likely to be based on firm performance. Also, when boards provide richer information, top executives are more likely to engage in behaviors t hat are consistent with stockholders interest. (Eisenhardt, 1989) Besides, to break agents superiority status on information is of great significance to keep balance between principals and agents and to improve agents performance. Moreover, profit sharing has been widely used as an attempt to give employees more opportunities to involve into and to get pleasurable emotion from the organization and to make employees feel they are part of the organization; to increase employees sense of commitment to organization; to increase sense of co-operation between management and subordinates; and to ensure employees benefit from organization profitability. In the public sector, administrators should frequently involve into policy-making process. Participatory management could be an efficient approach to get an alignment of goals of the management and subordinates and to motive employees performance consciousness. In addition, Principal-Agent theory could be used to elucidate hierarchical control of organizations as well (Moe, 1984). Difficulty in monitoring the actions of subordinates/agents, asymmetric information superior status of subordinates/agents, or transactions costs in supervising and verifying the actions of subordinates/agents all can give agents opportunities to escape from principals goals by maximizing agents interests. Typically, principals find means to ameliorate these problems, for example, by relying on signals that warn them when agents step outside certain bounds. (Song, Segal, and Cameron, 1976) Limitations of Principal-Agent Theory Principal-Agent theory, which characterizes relationships that develop and evolve, is supposed to be a dynamic, rather than a static theory (Waterman and Meier, 1998). It provides insightful and predictive theoretical contribution to organization and incentive theory development. Principal-agent theory provides a unique, realistic, and empirically testable perspective on problems of cooperative effort (Eisenhardt, 1989). Besides its theoretical contribution, however, principal-agent theory needs further improvement as the following: Principal-Agent Theory merely displays a partial aspect of the real world, although it is valid, and it also ignores a great amount of organizational complexity. Additional perspectives could contribute to attain the more important complexity (Eisenhardt, 1989). According to Ogden (1993), the highly simplified model of organizational conflict and the contrasting complexity of the mathematics required to provide solutions to the agency problem have been frequently cited as limitations to principal-agent theory. In addition, principal-agent theory could be developed to a richer and more complicated range of contexts. Principal-agent theory studies the relationship between the principal and the agent defined by contract, resting on a basis in economics. Under this theory, relationship problems are explained from a contractual perspective; and solutions derives from the change of contract. However, noneconomic considerations should be emphasized as well, such as cultural, social, psychological, and political. And some scholars have already argued to look at important non-contractual aspects of principal-agent relationship. So, to study principal-agent relationship from non-contractual perspectives is demanded and valuable. Conclusion Starting from an introduction to what is the principal-agent theory and the importance of the theory in public administration, we conclude that the principal-agent theory has contributed a lot to the development of organization theory and incentive theory. Although theoretical significant, principal-agent theory still has its limitations, such as simplified model and ignorance of non-economic factors, which leaves a long way for future development. Nevertheless, this term paper merely provides a short review and summary of principal-agent theory and its theoretical contributions. It is far from a comprehensive and deep study on principal-agent problems and solutions. Much more works are needed to elaborately review this theory.

Why We Need Universal Healthcare Essay -- Health Care, Medicare

Why We Need Universal Healthcare Many would argue that here, in the United States, we have the best healthcare in the world. We benefit from the most up to date medical technologies, medications, and services. People come from every corner of the world to take advantage of our top notch physicians and facilities. But is this reputation warranted, and if so, at what cost? The average annual cost per US resident is $7,681; this comprises 16.2% of our gross domestic product. These costs rank us among the highest of industrialized nations (Lundy, 2010). Does this high expenditure equate to better outcomes? According to the National Scorecard on US Health System Performance (2008), the US received a 65 out of 100 possible points. Compared with 19 other industrialized nations, the US came in last place in preventable mortality. Preventable mortality means just that, deaths which could have been prevented if â€Å"timely and effective care† could have been provided (The Commonwealth Fund on a High Performanc e Health System, 2008). In 2000, the World Health Organization performed their first ever comparison of the health systems of the world. They reviewed 191 different countries and ranked them on numerous parameters, the United States ranked 37th for overall health system performance (WHO, 2000). Is it that our healthcare system is truly that poor, or is it that our care is only excellent for those patients who can actually afford it? A universal healthcare system would not only provide healthcare for all, it could also decrease our healthcare spending and potentially produce better health outcomes. High quality and less expensive healthcare can be achieved with a universal healthcare model. In fact, the United States is the... ...healthcare. At this point, the law encourages the free market system by requiring employers to purchase private insurance for their employees or face penalties. It also imposes new regulations on private insurers mandating that they provide insurance for all people, regardless of health status and preexisting conditions (KaiserEDU.org, 2010). The effects of the new act will not be seen for many years, the majority of the sections are not required to be in action until 2014. In the meantime, detractors of the law are working tirelessly to have it overturned. We have the benefit of closely examining how other countries of the world provide healthcare for all of their citizens. We can compare what works with what does not. Maybe it’s time we stop trying to fix our already broken system and focus on real change, universal healthcare as a right, not a privilege.

Biophysical Interactions on the Reef

Ecosystems At Risk Reefs are important ecosystems as the are home to an immense amount of biodiversity and are essential in the cycle of life The Role of the Atmosphere Many reefs are located in the cyclone zone due to the necessary conditions they require to grow. For as long as reefs have existed they have been shaped by cyclones and intense storms. The severity of the storms and cyclones is determined by the length and intensity of the storms, which determines how much damage will be inflicted onto the reefs. The cyclones and storms generate large waves and strong winds, which do most of the damage to the reefs.The waves have the power to rip apart soft coral and chip and damage the harder coral. Sometimes cyclones may result in large amounts of the reefs systems being buried by sediment. Reefs are very delicate and need very precise conditions to live and grow, the amount of rain that is associated with intense low systems can flood the reef with fresh water and reduce the salini ty levels. During the storms the turbidly of the water also increases so the sunlight cannot reach the coral reducing its ability to produce food.Tropical cyclone Larry (2006) showed that reefs could benefit from storms. The waves that were produced by Larry removed sediment that had accumulated and reduce the water temperature to the ideal level. The Role of the Lithosphere The role of the lithosphere in forming and transforming the reef ecosystem is very important. The reefs build themselves, this works because when the coral dies it produces limestone which the new coral grows on. The limestone is also weathered down and redistributed to other parts of the ecosystem to create a range of other landforms.Through the production of limestone coral reefs are able to withstand the erosive power of waves. Overtime individual corals will of course die but this will allow the growth of new coral on the stable limestone structures the leave behind. Sediment is also an important influence o n the reef. Sediment such as sand and mud can cloud the water creating high turbidity. High levels of turbidity can reduce the suns ability to penetrate the water and thus effecting zooxanthellae’s photosynthesis. Coral reefs may also be smothered by sediment especially were the possibility of high runoff is likely.This is why in monsoonal areas and areas with high precipitation levels there are not many fringing reefs as they would struggle to cope with the change in salinity levels from the fresh water and the sediment increasing the turbidity levels. The Role of the Hydrosphere Coral reefs grow best in high wave energy areas. Reefs are very effective at interfering with wave energy. The structure of the reef is such that the seaward part of the reef absorbs much of the energy leaving an area of calm water behind it.The amount of water that flows across the reefs is so enormous that it is measured in cubic kilometres. The flow of the currents is very important to the reef e cosystem. When the currents flow in a direction that they bring warm waters, high saline levels and high levels of nutrition that is a huge contributor to the biodiversity that makes the reefs so important and unique. The Role of the Biosphere There are more then 330 species of coral that can be found in any one reef. The coral is a living animal called Polyps.Polyps are primitive organisms that consist of little more then a digestive sac and an out skeleton made from limestone. The Polyps feed by pulling food into its mouth through tentacles. Within the polyps lives an alga called zooxanthellae, the algae produces sugars and oxygen through photosynthesis. The polyps provide shelter for the algae and in return receive nutrients and the alga is also what gives the coral the distinct colours. Each coral reef begins as a single polyp, which reproduces itself to create a colony.Apart from coral reefs are highly diverse systems made up of thousands of species. The amount of nutrients cre ated by the plants and algae on the reef is several times that made in the open ocean. Because of the high levels of nutrients available on the reef there are thousands of fish species that feed on the nutrients produced and even the coral. Due to the abundance of fish some top order predators such as sharks and dolphins come to the reef. There are many different species living on reefs that work to keep the balance of life on the reef.

Reconstruction During The Civil War - 966 Words

Reconstruction is a time period after the Civil War ended in 1877. We view it as something that resembles a transformation, shifts in the southern U.S. after the Civil War. This was when slavery inequality, some political, economic, and social issues were, in some ways, balanced. The categories of issues that arose throughout this â€Å"restoration† were aspects such as involving the Confederacy into the Union, abolishing along with figuring out what to do with our free blacks, and addressing conflict between the Confederate leaders and a group of people, which we characterize as â€Å"the North.† During reconstruction, there was a challenging goal of incorporating former slaves into our nation as free citizens like everyone else. It looks like this â€Å"era† attempted to take out the unfairness of slavery; however, it was successful to a degree. Reconstruction, itself, was successful in fulfilling its goal to a degree because the Freedmen’s Bureau attemp ted to help former slaves with simple things such as housing, although it â€Å"lost its touch† due to deficiency of needed funds along with personnel, and trouble dealing with pressure that was advancing from the so-called white southerners. Upon origination, the Freedmen’s Bureau received its appearance as a good thing for former slaves, including those who were referred to as southern blacks. This organization had responsibilities in helping the blacks move from their state - slaves to something better- freedom. Quite remarkably,Show MoreRelatedReconstruction Of Reconstruction During The Civil War883 Words   |  4 Pages Describe and analyze Reconstruction. Did Reconstruction have any successes? The end of civil war in the United States of America brought about many problems, in particular for the South. Some of the problems were political, economic decay and social disorder. The war destroyed the plantations and crops thus causing many to starve to death while others became homeless. The reconstruction became the only hope for the people. Radical reconstruction began in 1867, which enabled the freed black menRead MoreReconstruction During The Civil War Essay1676 Words   |  7 PagesReconstruction The United States went through many changes after the Civil War and during the Reconstruction period of 1866-1877. Before Abraham Lincoln was assassinated on December, 1863, by John Wilkes, Lincoln announced the first Reconstruction plan a year before the Civil War had ended and Lincoln offered general amnesty to white southerners who would pledge an oath of loyalty to the government and accept the abolition of slavery. During the summer of 1865, Johnson not long after he took officeRead MoreReconstruction During The Civil War972 Words   |  4 PagesThere was a transformation period after the Civil War called the reconstruction during the years 1863 to 1877. The reconstruction was the rebuilding of the United States, mainly in the South. There were three major types of reconstruction, which were political, physical, and social. The political reconstruction allowed some African Americans to vote; however, they had to be literate in order to take the Oath test. Not many African Ameri cans knew how to read and write, because they were slaves andRead MoreReconstruction During The Civil War1487 Words   |  6 PagesReconstruction was the period when America was figuring out on issues pertaining to who was an American, what rights an American should enjoy and what rights other Americans were exercising. The post bellum period was a period after the civil war that had affected the United States of America. This conflict had mostly taken place in the south and therefore the people there were the for the most part affected by this warfare. After the civil war, racism was still a threat and a struggle for the nationRead MoreReconstruction During The Civil War864 Words   |  4 PagesIn hindsight it is sometimes claimed that Reconstruction was a failure. Although there was some good that came out of the Reconstruction it was mostly just a relentless uphill battle against Southerners and immoral politicians that were here to delay change and keep racism alive. Reconstru ction brought the Ku Klux Klan who displayed great resistance, and poverty that swept the South once the blacks were freed. The freedom of these black slaves led to discriminatory legislatures such as the BlackRead MoreReconstruction During The Civil War1892 Words   |  8 PagesReconstruction Over the course of America’s existence, it has acquired many successes and failures. Over time there have been a large number of accomplishments that have made the world a greater good, but there have also been phases of turmoil and tragedy. The Reconstruction period after the Civil War is a prime example of a complete failure. The Reconstruction period consisted of many goals and ideas that Americans planned to achieve in their country after being torn apart from the Civil War.Read MoreEducation During Reconstruction During The Civil War918 Words   |  4 Pagesâ€Å"Education during Reconstruction† In the south before during and after the reconstruction was a time for educational growth. Many states were just beginning to provide public education. The education system was trialed and errored to become the system that we know today during this era. The civil war brought separation of races but also families, the radical republicans stressed education during the reconstruction to avert the attention of the people from the war and racial issues. BeforeRead MoreThe Reconstruction Era During The Civil War1370 Words   |  6 PagesThe Reconstruction Era beginning in 1865 marked the period where white men and recently freed African Americans quarreled over the concept of equality on the basis of race as well as where freedom extended to. After the Civil War, there was a power struggle between the Republican and Democratic parties as they had extremely distinct ideas on whether African Americans should be free and hold citizen rights. African Americans were able to achieve citizenship as well as have equality through the 14thRead MoreThe Era Of Reconstruction During The Civil War1630 Words   |  7 Pageswas imposed by the white people. This contradiction is emblematic of the African-American experience. The era of reconstruction was a short-term success, a medium-term failure, and a foundation for the long-term successes of the civil rights movement in terms of black freedom. The era of reconstruction exposed the radical limits of freedom for natural born citizens in the post-civil war United States. The idea of freedom changed in a tremendous way for the blacks. I would like to begin by askingRead MoreThe Legacy Of Reconstruction During The Civil War Essay1254 Words   |  6 Pageshistory. These â€Å"revolutionary movements† have created lasting impressions on the United States that helped mold the nation that it is today. One such movement was Reconstruction. Reconstruction was a time in America consisting of reuniting the country and pulling it from the economic catastrophe that stemmed from the Civil War. The reconstruction era had dealt with three separate plans: the Lincoln Plan, the Johnson Plan and the congressional Plan. These plans, each with their own unique way of unifying