Chapter 3 Summary Essay

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Section 3.6
Consequences of Principal and Agent
Negotiation is defined as an interactive communication process by which two or more parties who lack identical interests attempt to find a way to coordinate their behavior or allocate scarce resources in a way that will make them better off than they could be if they were to act alone.

This definition references the basic elements of negotiation, parties, issues, goals and interactions.

It doesn’t address the context of the negotiation encounter, but it is a useful place to start.

Every social conflict, no matter the context within which it emerges, can also be said to have a structure.

The structure of a conflict should not be confused with the structure of negotiation, as described by Korobkin, which is also an important issue to be considered in educating negotiators.

When we talk about the structure of a conflict, we are referring to features of the conflict such as the number and nature of the parties and the quality of their relationships.

Conflict structure includes the number of parties involved. Is this a two party conflict or a multi-party conflict?

Sometimes agents and their principals use this structure of interconnected negotiations for strategic purposes. Parties can buy time in the primary negotiation by dragging out their back table negotiations.

The agent can also use an absent principal as an excuse for taking actions or for declining offers from the other party. On the other hand, there are times when problems with the back table negotiations actually jeopardize the central negotiation.

Highly skilled negotiators need to understand why this happens and how they can work with these problems.

Some principal-agent relationships are contractual and regulated. An agent is hired to negotiate on behalf of party A. Party A may fire the agent at will, and may also be able to hold the agent accountable for his performance according to the contractual agreement. The agent may quit as representative for party A and could possibly sue party A if they fail to meet contractual obligations.

There is a lot of trust between both parties that they both want whats best for each other and that they follow their contractual obligations.

Section 3.7
The Tension between Principals and Agents

Agency relationships are everywhere. We constantly delegate authority to others so that they may act in our place.

When a principal hires an agent to act on his behalf in negotiations across the table with another party, he expect naively that the agent will be motivated solely to serve the principals’s interests. This is how principal-agent relations would work ideally.

Although in the real world, agents always have interests of their own. As a result, the principal-agent relationship s rife with potential conflicts that demand skillful management behind the table.

Agenncy Benefits:
Knowledge- an agent may have specialized knowledge, that the principal lacks, about market conditions, formal or informal norms, or relevant risks and opportunities.
Resources- An agent, by reason of his reputation and relationships, may be able to provide access and opportunities that would otherwise be unavailable.
Skills- An agent may be a better negotiator than the principal, whether owning to experience, training, or natural ability.
Strategic Advantages- An agent may be able to use negotiation tactics on behalf of the principal in a way that insulates the principal from their full impact. The principal can remain the good cop while the agent plays the bad cop.

The Sources of the Tension:
Preferences
Incentives
Information

Management Mechanisms and their Limitations
Incentive contracts
Monitoring systems
Bonding

Incentive Contracts
Percentage compensation
Hourly fees
Fixed fees
Bonuses or penalties

Section 3.8
Faulty Agents
When suppliers seek advice on dealing with faulty agents, they might be told to listen actively, to improve
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