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This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownershi… - Michael Jensen
" "This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the 'separation and control' issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears the costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.
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About Michael Jensen
Michael Cole (Mike) Jensen (November 30, 1939 – April 2, 2024) was an American economist, and Emeritus Professor of Business Administration at , who works in the area of .
Also Known As
Native Name:
Michael C. Jensen
Alternative Names:
Michael Cole Jensen
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Mike Jensen
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This paper analyzes the relations between knowledge, control and organizational structure both in the market system as a whole and in private organizations. Limitations on the mental capacity of the human mind and the costs of producing and transferring knowledge means that knowledge relevant to all decisions can never be collected in the mind of a single individual or a small body of experts. This means that if the knowledge valuable to a particular decision is to be used in making that decision, there must be a system for partitioning out decision rights to individuals who already have the relevant knowledge and abilities or who can acquire or produce them at the lowest cost. Self interest on the part of individual decision-makers means a control system is required to motivate individuals with the decision rights and the relevant knowledge to use those decision rights appropriately. This control problem is solved in a capitalist economy by a system of alienable property rights.
The corporation as an organizational form is an enormously productive social invention. Partly because of its success it is under increasing attack from various quarters, often under the guise of “protecting” investors from self-interested managers. Some of these attacks are successful simply because the corporation is a poorly understood entity. This paper discusses what the corporation is, what it is not, and how certain misconceptions about the corporate form are fostered by its critics as part of their attack.
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We define an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to the relationship are utility maximizers there is good reason to believe that the agent will not always act in the best interests of the principal.
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