Lecture 1
Agency relationship = a situation in which one individual acts on behalf of another individual and is
supposed to advance the principal’s goals.
Moral hazard problem = ‘the gap’ between effort of the employee and the effort of the
entrepreneur. Arises because 1) providing effort is costly for the agent, monitoring is difficult,
performance measures are noisy signals of the agent’s effort and the agent is risk averse.
Agency costs = any cost that emerges because of having a principal-agent relationship and because of
trying to improve the functioning of this principal-agent relationship.
Management control = are employees implementing the outlined strategy? Internal focus
Strategic control = is our strategy valid, and if not, how should our strategy by changed? External
focus
Management control system = everything that firms can use to induce their employees to act in the
best interest of the firm
Theory = an integration of observations that provides an adequate explanation of human behavior.
Lecture 2
Performance measure = a quantifiable indicator used to assess how well an organization is achieving
the desired objectives.
Sensitivity = The extent to which the expected value of the PM changes with changes in the agent’s
effort. – degree to which the mean of the PM moves in response to an action by the agent.
(additional risk for the agent)
Precision = The extent to which the expected value of the PM is influenced by factors outside of the
control of the manager. (additional risk for the agent) – inverse of the variance of a performance
measure
Verifiability = The extent to which it is ex ante clear how the PM is calculated.
Congruence = The extent to which the PM reflects contributions to overall firm value. > A congruent
PM reflect the consequences of all actions an agent can take to increase firm value. (additional risk
for the principal)
Delegation = The extent to which employees have decision-making authority.
Aggregate PM = Measures that provide (some) information about ‘all’ actions.
Specific PM = Measures that provide (some) information about a subset of actions.
Congruity = To what extend does the PM captures the impact on firm value of the agent’s action.
(most important characteristic in the context of the intertemporal choice problem)
Intertemporal choice problem = The course of action that is best for the short term is not the same
course of action that is the best over the long term.
Lecture 3
Incentive-effect of promotions = If the probability of promotion/reward difference increases, then
this will lead to increased effort.
Agency relationship = a situation in which one individual acts on behalf of another individual and is
supposed to advance the principal’s goals.
Moral hazard problem = ‘the gap’ between effort of the employee and the effort of the
entrepreneur. Arises because 1) providing effort is costly for the agent, monitoring is difficult,
performance measures are noisy signals of the agent’s effort and the agent is risk averse.
Agency costs = any cost that emerges because of having a principal-agent relationship and because of
trying to improve the functioning of this principal-agent relationship.
Management control = are employees implementing the outlined strategy? Internal focus
Strategic control = is our strategy valid, and if not, how should our strategy by changed? External
focus
Management control system = everything that firms can use to induce their employees to act in the
best interest of the firm
Theory = an integration of observations that provides an adequate explanation of human behavior.
Lecture 2
Performance measure = a quantifiable indicator used to assess how well an organization is achieving
the desired objectives.
Sensitivity = The extent to which the expected value of the PM changes with changes in the agent’s
effort. – degree to which the mean of the PM moves in response to an action by the agent.
(additional risk for the agent)
Precision = The extent to which the expected value of the PM is influenced by factors outside of the
control of the manager. (additional risk for the agent) – inverse of the variance of a performance
measure
Verifiability = The extent to which it is ex ante clear how the PM is calculated.
Congruence = The extent to which the PM reflects contributions to overall firm value. > A congruent
PM reflect the consequences of all actions an agent can take to increase firm value. (additional risk
for the principal)
Delegation = The extent to which employees have decision-making authority.
Aggregate PM = Measures that provide (some) information about ‘all’ actions.
Specific PM = Measures that provide (some) information about a subset of actions.
Congruity = To what extend does the PM captures the impact on firm value of the agent’s action.
(most important characteristic in the context of the intertemporal choice problem)
Intertemporal choice problem = The course of action that is best for the short term is not the same
course of action that is the best over the long term.
Lecture 3
Incentive-effect of promotions = If the probability of promotion/reward difference increases, then
this will lead to increased effort.
