Agency Theory

Agency theory is a very academic term. Essentially it involves the costs of resolving conflicts between the principals and agents and aligning interests of the two groups.

Agency theory suggests that the firm can be viewed as a nexus of contracts (loosely defined) between resource holders. An agency relationship arises whenever one or more individuals, called principals, hire one or more other individuals, called agents, to perform some service and then delegate decision-making authority to the agents. The primary agency relationships in business are those (1) between stockholders and managers and (2) between debtholders and stockholders. These relationships are not necessarily harmonious; indeed, agency theory is concerned with so-called agency conflicts, or conflicts of interest between agents and principals. This has implications for, among other things, corporate governance and business ethics. When agency occurs it also tends to give rise to agency costs, which are expenses incurred in order to sustain an effective agency relationship (e.g., offering management performance bonuses to encourage managers to act in the shareholders’ interests). Accordingly, agency theory has emerged as a dominant model in the financial economics literature, and is widely discussed in business ethics texts. Continue reading

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Beer Distribution Game

The Beer Distribution Game (The Beer Game) is a simulation game created by a group of professors at MIT Sloan School of management in early 1960s to demonstrate a number of key principles of supply chain management. The game is played by teams of at least four players, often in heated competition, and takes from one to one and a half hours to complete. A debriefing session of roughly equivalent length typically follows to review the results of each team and discuss the lessons involved.

University scientists released the results of a recent analysis that revealed the presence of female hormones in beer. Men should take a concerned look at their beer consumption. The theory is that beer contains female hormones (hops contain phytoeostrogens) and that by drinking enough beer, men turn into women.

To test the theory, 100 men were fed 8 pints of beer each, within 1 hour period. It was then observed that 100% of the test subjects:
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Black Box Theory

Black box theoriesIn science and engineering, a black box is a device, system or object which can be viewed solely in terms of its input, output and transfer characteristics without any knowledge of its internal workings, that is, its implementation is “opaque” (black). Almost anything might be referred to as a black box: a transistor, an algorithm, or the human mind.

Black box theories have been proposed in various fields of philosophy and science by a number of philosophers and scientists. One prominent theory is the black box theory of consciousness, which states that the mind is fully understood once the inputs and outputs are well defined, and generally couples this with a radical skepticism regarding the possibility of ever successfully describing the underlying structure, mechanism, and dynamics of the mind.
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The Wheel of Retailing Theory

wheel of retailingNew types of retailing frequently start off with crude facilities, little prestige, and a reputation for cutting prices and margins. As they mature, they often acquire more expensive buildings, provide more elaborate services, impose higher margins, and become vulnerable to new competition. The author examines the history of numerous retail institutions to determine if this process really constitutes a “natural law of retailing.”

The wheel of retailing is the theory or observation that new competitors come into established retail markets offering lower prices, greater selection of a limited line of products, or unique products challenging a portion of the market of established firms. The new competitors can do this (and still earn a profit) by minimizing costs through limiting services, smaller stores, or control of inventories. In effect, the new firm is attempting to establish a niche market, attracting a portion of the established firm’s customers. Continue reading

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Procedural Justice Theory

Procedural justice theory examines the decision-making process in exchange relation-ships in which one party has decision making authority over issues that concern the other party (Lind & Tyler, 1988). As such, this theory deals with situations analogous to an agent-principal relationship in which the principal delegates decision-making authority to the agent. In contrast to agency theory, which focuses on how the relationship is structured to ensure proper decision making, justice theory examines the decision-making process and its impact on the exchange relationship. Specifically, the theory addresses what constitutes fair decision procedures and the importance of procedural justice to the exchange relationship. Several characteristics of the formal procedures and aspects of the conduct of the decision maker are known to contribute to perceptions of procedural justice. One of the most critical procedural factors is voice, the opportunity to provide input into the decision or control the information used to make the decision. In addition, various aspects of the decision maker’s information sharing are important, including showing consideration of others’ input, giving timely feedback on the results of the decision, and providing adequate justification for the decision (Tyler & Bies, 1990; Korsgaard, Schweiger, & Sapienza, 1995; Sapienza & Korsgaard, 1996) . Continue reading

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