Separation of Ownership and control, and agency costs Essay

Separation of Ownership and control, and agency costs - Essay Example The agreement structures together with the present production technologies and the outward lawful constraints to ascertain the cost function for conveying an output with a specific type of organization. The type of organization that survives is the one that conveys the output as per the customers’ demand at a cheaper price (Fama and Jensen, 1983, p. 302). The main agreements in any business organization outline two key things. These are the form of the lasting claims and the breakdown of the decision-making procedure that affects representatives. These are the agreements that make organizations be unique from one another and illustrate the reason behind the survival of various kinds of organizations. While concentrating on entrepreneurial organizations that require the entrepreneur to make all decisions, economists often disregard the analysis of the decision-making procedure. ... There is an emphasis on the factors that give survival value to organizational types that separate ownership and control. Residual Claims Most types of business organizations resort to agreement structures that reduce risks undertaken by representatives. This is achieved by introducing either fixed terms of remuneration or those that are pegged on performance. In addition, the agreements of most representatives comprise an implied or unequivocal provision that in exchange for the particular payoffs, the representative affirms that through the resources he accords, the interests of the residual claimants are met. Residual claimants emanate from one of the agent teams and it is likely to survive due to two reasons. First, it minimizes the expenses incurred while supervising the agreements made with other groups of representatives. Secondly, it minimizes those costs used to modify agreements for the dynamic risks encountered by other agent groups. The survival value of organizations is further enhanced by the agreements that express decisions towards the interests of lasting claimants. Different organizational forms have residual claims with varying controls. For instance, common stocks in large organizations are the least controlled lasting claims in regular use. Stockholders have provisions that do not require them to have any other duty in the organization, and their lasting claims are separate without limits. Such provisions enable stockholders to have unlimited risk sharing. These large scale organizations with such properties are referred to us open organizations. They are different from closed organizations which are not only smaller but also have lasting claims that are greatly restricted to