Agency issues of the firm and their application in an institutional comparison

Abstract

This thesis considers the delegation of economic activity within the firm. Of particular interest are broad tracts of literature which model the firm in a world of imperfect information and Self-interested actors. Section 1 considers complete contracting principal-agent models, where all actors within the firm are able to perceive all possible contingencies, and contract for them costlessly. This approach is recognised by many to be theoretically demanding; section 2 considers a number of incomplete contracting representations of the firm which impose fewer cognitive demands. In an incomplete contracting framework, contracting for all contingencies is prohibitively costly. Section 3 considers the importance of the identity of the owner to the operation of the firm. As a very limited illustration of the wide and detailed applicability of agency models of the firm, section 4 employs the theoretical discussion and review of the three initial sections to consider the relative efficiency of three organisational models. The discussion may provide some perspective on the recent debate in New Zealand concerning the appropriate size of the public sector, and the manner in which activity in the public sector might be organised.