Managers as Principals and Agents
The principal owns a simple organization in which an agent supervises operatives. The agent chooses his/her own effort as well as the number of operatives to be hired. Operatives receive fixed wages and the agent a share of profits. In this model explicit solutions are given for the agent’s chosen effort and the agent’s optimal profit share. Increasing returns to scale lead to richer results than the constant returns to scale case.
KeywordsProduction Function Full Time Work Optimal Share Simple Organization Absentee Owner
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