Chapter 4 - Organizational architecture. The main contents of the chapter consist of the following: Self-interested behavior, team production, firm as a nexus of contracts, principal-agent model, contract issues to consider, agency problems,. | Organizational Architecture Chapter Four Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Self-interested Behavior Fundamental assumption of economics: Individuals act in their own self-interest to maximize utility. Opportunity set: work for employer, work on other projects, relax, etc. Resource constraints: time, money, knowledge, etc. Utility: preferences for money, working conditions, leisure, etc. 4- Team Production Individuals form teams or firms because: can produce more in a team than they can acting alone generate a larger opportunity set Firm is defined as a nexus of contracts among resource owners who voluntarily contract with individual team members to benefit both the firm and the individuals. Firms in an economic sense include for-profit corporations, divisions within a corporation, not-for-profit organizations, and other entities. 4- Firm as a Nexus of Contracts From Brickley, C. Smith, and J. Zimmerman, Managerial Economics and Organizational Architecture, Fifth Edition, (Boston: McGraw-Hill/Irwin, 2009). The firm is a legal entity that can contract with many parties and enforce these contracts in courts of law. labor contracts: employee, union, independent contractors supply contracts: inventory, materials, utilities customer contracts: sales, warranties finance contracts: insurance, leases, franchises, debt, stock Some contracts are explicit written documents and others are implicit oral agreements supported by the reputation of the parties. 4- Principal-Agent Model Principal-agent model Economic model of relationships in a firm Principals are managers or firm owners Agents are employees or independent contractors Agents perform functions for principals Numerous principal-agent relationships exist in firms Agency costs Reductions in firm value caused when agents pursue their own interests to the detriment of the principal (goals are incongruent) A major use of internal accounting systems is | Organizational Architecture Chapter Four Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Self-interested Behavior Fundamental assumption of economics: Individuals act in their own self-interest to maximize utility. Opportunity set: work for employer, work on other projects, relax, etc. Resource constraints: time, money, knowledge, etc. Utility: preferences for money, working conditions, leisure, etc. 4- Team Production Individuals form teams or firms because: can produce more in a team than they can acting alone generate a larger opportunity set Firm is defined as a nexus of contracts among resource owners who voluntarily contract with individual team members to benefit both the firm and the individuals. Firms in an economic sense include for-profit corporations, divisions within a corporation, not-for-profit organizations, and other entities. 4- Firm as a Nexus of Contracts From Brickley, C. Smith, and J. Zimmerman, Managerial .
