Agency theory helps to align the interests of principals (shareholders) and agents (managers) by providing incentives for the agent to act in the best interest of the principal. Through mechanisms such as performance-based compensation and monitoring, agency theory aims to reduce agency conflicts and ensure that managers make decisions that maximize shareholder value. Additionally, agency theory provides a framework for understanding the relationships and responsibilities between principals and agents in a business setting.
Agency theory was first articulated by economists Michael C. Jensen and William H. Meckling in the 1970s. They proposed that conflicts of interest between principals (owners) and agents (managers) could potentially lead to agency problems within organizations.
Agency theory was propounded by economist Michael C. Jensen and legal scholar William H. Meckling. The theory is based on the assumption that conflicts of interest exist between principals (such as shareholders) and agents (such as company executives) due to differing goals and information asymmetry.
The agent in the agency theory would likely be asserted when there is an issue of conflicting interests between the principal (shareholders) and the agent (management). This is common in situations where the agent has more information or authority than the principal, leading to potential agency problems such as moral hazard or adverse selection.
Both are about relationships between principle and agent, such as owners hiring a manager to make decisions.The agency theory believes that managers if left unattended will make decisions based on self-interest.In contrast, the stewardship theory believes that if given authority andresponsibility, the agent can act on behalf of the principle.It is a difference in perspectives, and the result is that companies give high incentives so that managers act in the interests of owners (agency theory)
Those theories both refer to international trade, however absolute advantage was mentioned earlier. According to it, a trade between 2 countries is possible only if one has absolute advantage (produces a good with less costs or with less time) and other has absolute disadvantage in producing that good but at the same time it must have an absolute advantage in producing the secong good. If a country produces a good better (cheaper/faster), it would specialize on it and export. Theory assumes that only 2 counties and 2 goods exist, no other costs except for labour are taken into account.
The problem of agency theory are pricniple and agent.
Advantage of reference frame theory
explain theory of absolute cost advantage as propounded by Adam smith
theory of comparative advantage.
Agency theory is a theory explaining the relationship between principals, such as a shareholders, and agents, such as a company's executives. In this relationship the principal delegates or hires an agent to perform work. The theory attempts to deal with two specific problems: first, that the goals of the principal and agent are not in conflict (agency problem), and second, that the principal and agent reconcile different tolerances for risk.
Agency theory pertains to the relationship between two parties; the first is the principal (or principals) and the second, the agent (or agents), who are engaged as employees or independent contractors.
Two forms of agency theory have developed: positivist and principal-agent (Jensen, 1983). Positivist researchers have emphasized governance mechanisms primarily in large corporations.
The modern theory of international trade works on assumptions of the law of comparative advantage. The comparative advantage arises as a result of differences in the various regions.
absolute cost advantage talks about the efficiency and cheaply a country incure in the production of goods and services against other country whiles comparative advantage talks about the opotunity cost of goods
advantage and disadvantage of motivation
Agency theory was first articulated by economists Michael C. Jensen and William H. Meckling in the 1970s. They proposed that conflicts of interest between principals (owners) and agents (managers) could potentially lead to agency problems within organizations.
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