Armen alchian 1914 20 was an american economist born and raised in california. Klein, benjamin, robert crawford, and armen alchian. Demsetx distinct from the partitioning of the domain of uses to which a resource may be put is the decision process that may be relied upon to determine that use. Demsetzproduction, information costs, and economic organization. Anticipating modern behavioral economics, alchian explains that. Vertical integration, appropriable rents and the competitive contracting process. Meckling university of rochester abstract 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. Corporate managers are the agents of shareholders, a relationship fraught with conflicting interests. The paper covers the remarkable story of armen alchians attempt to figure out the fissile material in nuclear weapons. Identify mechanisms that vest decision control idea ratification and monitoring with residual claimants and decision management in hands of those best informed and capable to handle it. Alchian, armen 1993, property rights in the concise encyclopedia of economics, liberty fund. Origin of the theory of agency university of pittsburgh. Agency theory agency theory suggests that the firm can be viewed as a nexus of contracts loosely defined between resource holders. Agency theory attributes uncertainty in performance outcomes to moral hazard, adverse.
Along with research primarily in international economics and the history of economic theory, he has concentrated on. One of my favorite economists died earlier this week, armen alchian of the ucla school of economics. Alchian s generalization alchian s generalization states that when an equal amount of payment is added to two competitive goods, the price of the dearer one will fall relative to the cheaper one. Jensen corporate managers are the agents of shareholders, a relationship fraught with conflicting interests. Interesting story fact about armen alchian alchians critique of keyness theory of investment 1955 is a classic in investment theory while his work on unemployment 1969 was one of the first to consider the natural rate of unemployment arising from job search. One of the first papers to elucidate these ideas was published in 1972 by armen alchian and harold demsetz. Many students and others who read economics are disturbed by economists assumptions that companies maximize. 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 decisionmaking authority to the agents. Two important problems face a theory of economic organization to explain the conditions that. A major microeconomic theorist, he is known as one of the founders of new institutional economics and widely acknowledged for his work on property. He attended california state university, fresno for two years before transferring to stanford university in 1934, where he earned both a b. Apr 18, 2019 agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents.
Alchian learned to build the bomb, forthcoming in journal of corporate finance. Like coase, alchian has published only a few articles, but very few are unimportant. The exercise of a particular right may depend on a decision process in which many individuals share, such as. While consistent with the concept of agency traditionally advanced by legal scholars and attorneys, the economic variants of agency theory emphasize the costs and benefits of the principalagent relationship. A major microeconomic theorist, he is known as one of the founders of new institutional economics and widely acknowledged for his work on property rights. The microeconomic analysis that i learned from armen alchian and bill allen, and from their colleagues at ucla, was the foundation of most of my useful work during my career as a microeconomist.
Footnotes of the article are included between horizontal lines. Eisenhardt stanford university agency theory is an important, yet controversial, theory. Armen alchian was one of the great economists of the twentieth century, and his 1950 paper, uncertainty, evolution, and economic theory, one of the most important contributions to the economic literature. The policing arguments are developed in the context of the theory of agency, presently under development see mitnick 1973, 1974, 1975. There will be a special econ tea on tuesday, may 20 at 2. During the nineteenseventies formal agency theory blossomed ross 1973 is an.
Alchian, 1978, vertical integration, appropriable rents and the competitive contracting process, journal of law and economics 21, 297326. Six big ideas coases theory of the firm schools brief. Managerial behavior, agency costs and ownership structure. This tradition emphasizes that individual behavior is selfseeking and rational and that this has many unanticipated consequences. Pdf uncertainty, evolution and behavioral economic theory. Nov 14, 2018 interesting story fact about armen alchian alchians critique of keyness theory of investment 1955 is a classic in investment theory while his work on unemployment 1969 was one of the first to consider the natural rate of unemployment arising from job search. Most younger economists gain exceptional technical training, but many of them seem to lack the clear intuitive understanding of microeconomics that. Uncertainty, evolution, and behavioral economic theory by.
Resource owners increase productivity through cooperative. Armen alchian, an american economist born in fresno, california, is in many ways like ronald coase. If you dont feel like reading any further, there is a wall street journal obituary that probably says whatever i say, only better. This is done through contracts, just as it is between individuals and firms in what we normally consider market. Interesting story fact about armen alchian alchian s critique of keyness theory of investment 1955 is a classic in investment theory while his work on unemployment 1969 was one of the first to consider the natural rate of. A modification of economic analysis to incorporate incomplete information and uncertain foresight as axioms is suggested here. Dec 01, 2014 armen alchian 1914 20 was an american economist born and raised in california. A major microeconomic theorist, he is known as one of the founders of new. These authors emphasize, first, that cooperation is enhanced when it is accomplished by the. But this means an inherent contradiction in a world of uncertainty if costs are defined as a quantitative concept. See all formats and editions hide other formats and editions. And like coases, many of alchians articles are widely cited.
Most commonly, that relationship is the one between. An agency costs theory of trust law 1 introduction agency cost theories of the firm dominate the modern literature of corporate law and economics. Mar 14, 2014 armen alchian was one of the great economists of the twentieth century, and his 1950 paper, uncertainty, evolution, and economic theory, one of the most important contributions to the economic. Alchian, armen 1965 the basis of some recent advances in the theory of. But the theory of profitmaximization like the theory of overtaking must write down all the components separately.
It is one centralized contractual agent in a team productive process. Agency costs of free cash flow, corporate finance, and takeovers by michael c. Alchian, uncertainty, evolution and economic theory, 58 j. Behavior, agency costs and capital structure, journal of financial economics 3, 305360. The authors explain the interconnection between goods prices and productiveasset prices and how marketdetermined interest rates bring about the allocation of resources toward the satisfaction of consumption demands versus. Financial agency theory, in organizational economics, a means of assessing the work being done for a principal i. The first is the agency problem that arises when a the desires or goals of the principal and agent conflict and b it is difficult or expensive for the principal to verify what the agent is actually doing. Agency theory is an important, yet controversial, theory. Managerial behavior, agency costs and ownership structure,3j ournal of f inancial e conomics 305 1976. Agency problems and the theory of the firm semantic scholar. To avoid this contradiction it is suggested to ascribe only a metaphorical sense to the term cost. Armen alchian deserves the nobel prize lawrence economics blog.
New paper on armen alchian, behavioral economics, and the. Agency theory, the anal ysis of such conflicts, is now a major part of the economics literature. Specifically, this theory is directed at the ubiquitous agency relationship,in which one party delegates work to another agent who performs that work. The striking insight of alchian and demsetz 1972 and jensen and. Alchian allen exchange and production pdf the alchian allen effect was described in by armen alchian and william r allen in the such as high and low grades of the same product, are both increased. The basis of some recent advances in the theory of management of the firm. Managerial behavior, agency costs and ownership structure, 3 j. In 1946, he joined the economics department at ucla, where he spent the rest.
He served as a statistician with the usa army air corps, from 1942 to 1946. Alchian 1965, 1968, alchian and kessel 1962, demsetz 1967, alchian and demsetz 1972, monson and downs 1965, silver and auster 1969, and mcmanus 1975. May 19th agency theory strategy alchian demsetz1972. Jul 15, 20 agency theory broadened this risk sharing literature to include the so called agency problem that occurs when cooperating parties have different goals and division of labour. Agency costs of free cash flow, corporate finance, and takeovers michael c. Monitoring or metering the productivities to match marginal. Although the law of agency had a role in the naming of the theory of agency, it would be many years before other scholars also applied materials from the law of agency to the social science theory of agency see robert clarks chapter in the pratt and zeckhauser 1985 volume. The conclusions are that agency theory a offers unique. Pdf production, information costs, and economic organization. Smith, wolf weinhold, and especially armen alchian and richard ruback. This gives rise to shirking, unless individuals within group can costlessly detect and punish. Agency theory is concerned with resolving two problems that can occur in agency relationships. Alchian, armendemsetz, harold 1972, production, information cost, and economic.
Agency problems, auditing, and the theory of the firm. For a survey of general issues in the analysis of organizations, see michael c. Agency theory to keep the exposition simple, we will make a very specific assumption. Some history and prospects of economic research on decisionmaking in organizations. Agency costs of free cash flow, corporate finance, and. Gordon donaldson 1984 in his study of 12 large fortune 500 firms concludes that managers of these firms were not driven by maximization of the value of. Article information, pdf download for agency theory and uncertainty in. Agency theory provides a series of instructive parables concerning the. Uncertainty, evolution and economic theory by armen alchian 1. Armen alchian 1950, 1953 took issue with both machlup and the antimarginalists. Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Alchian and harold demsetz the mark of a capitalistic society is that resources are owned and allocated by such nongovernmental organizations as firms, households, and markets. Alchian was born in fresno, california into an armenian family.
I cut a swathe through the social fabric where agency relationships are especially prevalent and examine some of. Production, information costs, and economic organization by armen a. View notes may 19th agency theory strategy from mgt 6944 at virginia tech. The first scholars to propose, explicitly, that a theory of agency be created, and to actually begin its creation, were stephen ross and barry mitnick, independently and roughly concurrently. Armen alchian is known to his students and colleagues and others as the founder of the ucla tradition in economics, a tradition that continues to this day. Agency theorists attempt to design the most cost effective information systems. They defined the firm as the central contractor in a teamproduction process. Agency costs of free cash flow, corporate finance, and takeovers.
The exercise of a particular right may depend on a decision process in which many individuals share, such as in the use of majority voting. The conclusions are that agency theory a offers unique insight into in. Firmsentrepreneursmanagers do not own all of their inputs particularly human capital. April 12, 1914 february 19, 20 was an american economist. Contracts we will focus on contracts in which the agents total compensation for the period of the contract, denoted by w, is a linear function of output. Agency theory broadened this risk sharing literature to include the so called agency problem that occurs when cooperating parties have different goals and division of labour. Universal economics shows the critical importance of property rights to the existence and success of market economies. Agency theory key articles in economics alchian and demsetz 1972. Production, information costs, and economic organization. He studied at stanford university where he received both his b. His argument was that, quite simply, the neoclassical theory of the firm is not about firms as such but industries.
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