Corporate Responsibility SMV
HW for HC 1
Paper: Theory of the firm: managerial behavior, agency costs and ownership
structure – Jensen & Meckling
J&M investigated how ownership and managerial behavior can influence firm’s
performance. They introduce the agency theory → owners (principals) and managers
(agents) can have conflicting interests, leading to agency costs like monitoring costs
and loss of value for the owners. These agency costs can be reduced by specifying
property rights in contracts, as rights help to align their interests by providing
incentives for agents to act in the best interest of shareholders.
They discuss how different ownership structures (private/ public/ shareholder)
influence interests. For example, the shareholder ownership tends to protect the
interests of owners because they can quickly detect and correct value loss.
The design of the ownership structure and contracts can influence managerial
behavior → managers should be rewarded based on their performance.
Video: Positive externality
Normal situation
Demand for trees.
And there is a benefit associated with trees (control pests, improve air quality and
better look) → positive externality → €10 per tree → creating this figure:
Marginal benefit + external benefit for society.
Green /// = benefit for society
Yellow /// = consumer surplus
Pink /// = producer surplus
Orange /// = dead-weight loss → fix this, stimulate to plant more trees by giving a
subsidy for those that buy/plant a tree → optimal quantity is produced → new figure:
, → (consumer) surplus is higher!
Video: Negative externality
Normal situation
/// = consumenten + producentensurplus
Demand of supermarkets for plastic bag = marginal benefit, supply = marginal cost
But there is a cost associated with plastic bags (litter & bad for environment) →
negative externality → €0,02 per bag → creating this figure:
||| = positive surplus, lower than before since
accounted for all costs and benefits in society.
HC 1
The corporation in the Neo-classic model and its challenges
Agenda
• Introduction
• Course organization
• The Neo-classic model of corporation
,What is a corporation?
• Sole proprietorship (= eenmanszaak)
▪ Owner = firm
▪ Unlimited personal liability
• Partnership
▪ All partners are liable for the debt.
▪ Bijv. group of lawyers.
• Limited liability companies
▪ Firm as a legal entity with contractual rights and obligations.
▪ Limited liabilities.
▪ Separation of ownership and control.
▪ Joint stock
▪ Can be publicly listed or privately held companies.
In this course, we focus on limited liability companies.
Corporate profits flow to households
• Positive spillovers (technology, health care etc.)
• Negative spillovers (environmental and social impact)
Adam Smith: the invisible hand
‘’It is not from the benevolence of the batcher, the brewer, or the baker that we expect
our dinner, but from the, but from their regard to their own self-interest!’’
The system in which each firm and individual pursues their own interest is the best.
The company and its stakeholders
• Customers
• Shareholders/ investors
• Suppliers
• Employees
• Local communities
• Governments and Public Bodies
• NNPOs/ NGOs
• Global Environment
In the perfect world:
• Complete contract specifies…
▪ All rights and obligations of all parties.
▪ In every possible future state of the world.
• Perfect information
▪ No agency costs
How to maximize social welfare in this Neo-classic model?
Milton Friedman (1970)
‘’The one and only social responsibility of business – to use its resources and engage
in activities designed to increase its profits…!’’
, By maximizing shareholder value, all other stakeholders also improve their welfare in
the Neo-Classic model.
‘If you sell a lot, your suppliers also benefit as they sell a lot to you’.
Friedman Doctrine
‘Only take care of business, not the other stakeholders.’
That responsibility is to conduct the business in accordance with their desires, which
generally will be to make as much money as possible while conforming to the basic
rules of the society, both those embodied in law and those embodied in ethical
custom.
He (the manager) is spending his own money or time or energy, not the money of his
employers or the time or energy he has contracted to devote to their purposes. If
these are ‘social responsibilities’, they are the social responsibilities of individuals, not
of business.
The Neo-Classic Model and externalities
• Positive externalities
Bijv. employee training increases productivity and employee loyalty, but it also
benefits others employers.
• Negative externalities
Bijv. fertilizers from farming lead to ‘dead zones’ in the ocean.
Pacific Gas & Electric company contaminating water for the neigbourhood (Film-Erin
Brockovich, 2000)
How to deal with externalities?
• Pigouvian Tax (by Arthur Cecil Pigou)
▪ To offset negative externalities with tax.
▪ To encourage positive externalities with subsidy.
▪ Government plays a central role in welfare economics.
• Coase Theorem (by Ronald Coase).
▪ The producer purchases rights to pollute.
▪ The producer invests in new technology or clean up pollution.
▪ Or the community is compensated for the negative externalities.
▪ Government taxes the polluter and compensates the victims.
If there is no transaction cost, parties can always find efficient solutions.
The Neo-Classic model – externalities
HW for HC 1
Paper: Theory of the firm: managerial behavior, agency costs and ownership
structure – Jensen & Meckling
J&M investigated how ownership and managerial behavior can influence firm’s
performance. They introduce the agency theory → owners (principals) and managers
(agents) can have conflicting interests, leading to agency costs like monitoring costs
and loss of value for the owners. These agency costs can be reduced by specifying
property rights in contracts, as rights help to align their interests by providing
incentives for agents to act in the best interest of shareholders.
They discuss how different ownership structures (private/ public/ shareholder)
influence interests. For example, the shareholder ownership tends to protect the
interests of owners because they can quickly detect and correct value loss.
The design of the ownership structure and contracts can influence managerial
behavior → managers should be rewarded based on their performance.
Video: Positive externality
Normal situation
Demand for trees.
And there is a benefit associated with trees (control pests, improve air quality and
better look) → positive externality → €10 per tree → creating this figure:
Marginal benefit + external benefit for society.
Green /// = benefit for society
Yellow /// = consumer surplus
Pink /// = producer surplus
Orange /// = dead-weight loss → fix this, stimulate to plant more trees by giving a
subsidy for those that buy/plant a tree → optimal quantity is produced → new figure:
, → (consumer) surplus is higher!
Video: Negative externality
Normal situation
/// = consumenten + producentensurplus
Demand of supermarkets for plastic bag = marginal benefit, supply = marginal cost
But there is a cost associated with plastic bags (litter & bad for environment) →
negative externality → €0,02 per bag → creating this figure:
||| = positive surplus, lower than before since
accounted for all costs and benefits in society.
HC 1
The corporation in the Neo-classic model and its challenges
Agenda
• Introduction
• Course organization
• The Neo-classic model of corporation
,What is a corporation?
• Sole proprietorship (= eenmanszaak)
▪ Owner = firm
▪ Unlimited personal liability
• Partnership
▪ All partners are liable for the debt.
▪ Bijv. group of lawyers.
• Limited liability companies
▪ Firm as a legal entity with contractual rights and obligations.
▪ Limited liabilities.
▪ Separation of ownership and control.
▪ Joint stock
▪ Can be publicly listed or privately held companies.
In this course, we focus on limited liability companies.
Corporate profits flow to households
• Positive spillovers (technology, health care etc.)
• Negative spillovers (environmental and social impact)
Adam Smith: the invisible hand
‘’It is not from the benevolence of the batcher, the brewer, or the baker that we expect
our dinner, but from the, but from their regard to their own self-interest!’’
The system in which each firm and individual pursues their own interest is the best.
The company and its stakeholders
• Customers
• Shareholders/ investors
• Suppliers
• Employees
• Local communities
• Governments and Public Bodies
• NNPOs/ NGOs
• Global Environment
In the perfect world:
• Complete contract specifies…
▪ All rights and obligations of all parties.
▪ In every possible future state of the world.
• Perfect information
▪ No agency costs
How to maximize social welfare in this Neo-classic model?
Milton Friedman (1970)
‘’The one and only social responsibility of business – to use its resources and engage
in activities designed to increase its profits…!’’
, By maximizing shareholder value, all other stakeholders also improve their welfare in
the Neo-Classic model.
‘If you sell a lot, your suppliers also benefit as they sell a lot to you’.
Friedman Doctrine
‘Only take care of business, not the other stakeholders.’
That responsibility is to conduct the business in accordance with their desires, which
generally will be to make as much money as possible while conforming to the basic
rules of the society, both those embodied in law and those embodied in ethical
custom.
He (the manager) is spending his own money or time or energy, not the money of his
employers or the time or energy he has contracted to devote to their purposes. If
these are ‘social responsibilities’, they are the social responsibilities of individuals, not
of business.
The Neo-Classic Model and externalities
• Positive externalities
Bijv. employee training increases productivity and employee loyalty, but it also
benefits others employers.
• Negative externalities
Bijv. fertilizers from farming lead to ‘dead zones’ in the ocean.
Pacific Gas & Electric company contaminating water for the neigbourhood (Film-Erin
Brockovich, 2000)
How to deal with externalities?
• Pigouvian Tax (by Arthur Cecil Pigou)
▪ To offset negative externalities with tax.
▪ To encourage positive externalities with subsidy.
▪ Government plays a central role in welfare economics.
• Coase Theorem (by Ronald Coase).
▪ The producer purchases rights to pollute.
▪ The producer invests in new technology or clean up pollution.
▪ Or the community is compensated for the negative externalities.
▪ Government taxes the polluter and compensates the victims.
If there is no transaction cost, parties can always find efficient solutions.
The Neo-Classic model – externalities
