Jul 16, 2017

Incentive Conflict Essay #2

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Incentive Conflict Essay #2


Identify an incentive conflict in your firm, or one you have read about, that reduced firm value. As part of your answer discuss whether or not one or more of the legs of the organizational stool was unbalanced, and if so, how that contributed to the conflict.

Before you compose your discussion and identify an incentive conflict in your firm or one you have read about that reduces firm value, please do some research on incentive conflicts and problems and make sure you understand the concept.

Hint below:

We can view a firm as the focal point of a set of contractual relationships such as the relationship between firm and suppliers, firm and employees, firm and bond holders, firm managers and owner shareholders, etc. Since humans are self-interested, not necessarily selfish, and information is not perfect, agents (e.g., managers) don’t always act in the best interest of the principals (e.g., owner shareholders). Therefore, there will be problems caused by conflict of interests or the incentive problems. If information is perfect, self-interest would not be a concern because everybody has a crystal ball, and principals can precisely predict the behaviors of agents. Contracts have the purpose of aligning agent’s interests with those of principal’s and helping reduce incentive problems. Imperfect information could cause incentive problems before or after a contract is reached, i.e., precontractual or postcontractual incentive problems. An example of precontractual problems is Adverse Selection, and an example of postcontractual problems is Agency Problem. The owner-manager problem is a type of agency problem.


Incentive Conflict Institutional Affiliation Student name Date Construction is the core of our company. There is a variety of activities done before the construction is over. They range from the laying of the foundation to the finishing of the construction. Therefore, it involves many subcontractors. These include activities like looking for surveying agents, electricians,


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