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NHL Trade Deadline Countdown (Part II: labor contract negotiations)

After yesterday I had initially turned to the basics, the theory now follows on labor contract negotiations.
The principal-agent model is an upcoming model from the economics of the New Institutional Economics. This theory is well established in the social sciences, sociology and political science.
This refers to the principal customer (GM) and the representative agent. The latter case normally has a knowledge advantage (information asymmetry), which can be used in different ways, either for or against the principal. The theory thus offers a model to explain the actions of people and institutions in a hierarchy. It also makes general statements about the design of contracts.

The principal-agent theory assumes economic agents that are restricted in their decision making, such as asymmetric information. You only have incomplete information when they evaluate the actions of others will.
Furthermore, the participants will be subject to opportunism. In a broad definition, there is a principal-agent relationship, when the welfare of one party (principal) of the actions of another party (agent) is dependent. After narrow definition, there is a client (principal), who appoints a contractor (agent) by mutual agreement to pay with a task. As the two pursue different objectives, there can be conflicts.
In addition, risk preferences are taken into account: In principle, possible on both sides of risk neutrality, risk aversion or risk taking. This depends on the character and situation of the actors.

The principal asked the agent in the hope that it does its job in terms of the principal. However, it can recognize the commitment and / or the qualities of his agents with limitations and see - if at all - only the result of his efforts. In contrast, the agent has an information advantage, because he knows its own quality and better define the behaviors themselves, and can judge accordingly well. He will exploit the information asymmetry to the detriment of the principal that if his own purposes is relevant (moral hazard and shirking).
A first problem area relates to hidden characteristics. Before signing the contract (ex ante) the principal, the agent may be relatively unknown. The principal could have due to the lack of knowledge of the properties chosen the wrong candidate as an agent. To avoid this, the agent must send clear signals that can be imitated by any inferior competitors. Also, the principal can resolve this information deficit by a so-called "screening" performs. Another solution to the problem is given by "self selection" by submitting multiple contracts to the agent, the agent must choose between them. From the selection made by the agent can draw a conclusion about the principal agents of possible strategies.

Among the types of problems hidden action and hidden information, the information asymmetries on the other hand, occur only ex post, after the contract conclusion and during contract performance. Hidden action means that the agent has discretionary leeway, since the principal's actions can not (fully) observed. Hidden information is available on the other hand, if the principal while watching the action, but their quality (eg due to lack of expertise) can not estimate.
In both cases the problem is that the principal can not judge and ex post, whether the resulting outcome has been achieved through the efforts of qualified agents, or whether (or how) the environmental conditions have affected the result.
Among the types of problems hidden action (hidden action) and hidden information (hidden information), however the information asymmetries occur only ex post, after the contract conclusion and during contract performance. Hidden action means that the agent has discretionary leeway, since the principal's actions can not (fully) observed. Hidden information is available on the other hand, if the principal while watching the action, but their quality (eg due to lack of expertise) can not estimate.

In both cases the problem is that the principal can not judge and ex post, whether the resulting outcome has been achieved through the efforts of qualified agents, or whether (or how) the environmental conditions have affected the result.
The principal-agent theory is based on asymmetric information. Therefore, the best solution, in the case of symmetric information would be theoretically possible, is not given. If we therefore now based on asymmetric information and the lack of information not now be corrected, then only one third-best solution can be achieved. The aim must therefore be given information on the defects yet to achieve at least a second-best solution. Nevertheless, it can be applied cost-scouting.

The problem of principal-agent theory can be solved by the following mechanisms:
• bureaucratic control (hierarchy)
• Information systems (controlling, scouting)
• incentives (incentives, bonuses)
• Corporate Culture
• Reputation
• Trust

Effective systems are especially who give the agent an incentive to correct behavior. Through a performance-based remuneration to the agent's goals are aligned with the goals of the principal. A distinction is more incentive systems:
• The "all-or-nothing" principle, where the agent is paid only for a specific result
• lease, where the agent a fixed amount to the principal outputs and may be allowed to keep a surplus
• fixed pay, where the agent is paid regardless of the outcome (no incentive)
• Share cropping, where the profit is divided between principal and agent proportionally.

Each system has its strengths and weaknesses in terms of risk distribution, stimulus intensity and control effects.
A corporate culture can lead to the reduction of agency costs. Similarities in preferences, values​​, goals and competencies to minimize coordination costs. This facilitated mutual learning and coordination. The efficiency aspects dominate, but they are undermined by the homogeneous culture: Longer-term relationships often cause the case of homogeneous cultures of transaction-specific investments that increase dependency and allow it to exploit the weak and to behave opportunistically.
Reputation can be as specific capital suggest that it be defended, there are more possibilities for opportunism. A good reputation lowers the incentive for opportunistic behavior and therefore it reduces information and transaction costs (ex ante).
The principal-agent theory is now next to the transaction cost theory, the theory of property rights and the resources of the leading theoretical explanations that are discussed in economics and applied.

(Thanks to my wife for her scientific support on this issue.)

Tomorrow part III, what the theory means to Oil contract negotiations

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