Econ: Economics and Principal-agent Problem Essay

Submitted By adria20
Words: 942
Pages: 4
Open Document
1. What’s the economic issue you have chosen to write about, and why is it important?
The economic issue that I have chosen to write about is the issue number 2, which is “Should the compensation of executives be subject to government regulation?”. The question of whether CEOs of major companies are overpaid has been a constant subject of interest for many years with so many different answers and opinions about it. But, nowadays, this question has taken a bigger dimension. The reason why more people are concerned right now than in the past about the compensation of executives and the reason why the government has started to impose new regulations is due to the global financial crisis that started in 2007-2008, which caused a huge economic slowdown in the economy. Moreover, another cause is the steady increase of the compensation of executives of financial institutions, as a study of Edwards School of Business claims, even though their companies were “supposedly” in trouble due to the slowdown.
The recent financial crisis generated so many problems in most of the economies around the world and as a result those economies entered into a recession and a large percentage of people who were employed lost their jobs. For example, accordingly to the US Bureau of Labor Statistics, US seems that is recovering from the crisis and the unemployment rate is decreasing a little bit, but in 2010 the unemployment rate was around 10%. Other countries in Europe, such as Spain, are much worse than US. Spanish unemployment rate right now is 27%, as the INE (Spanish National Institute of Statistics) indicates.
So, how can executives of financial institutions have higher compensations than before during the slowdown? It does not make sense that a lot of people do not even have money for food because they lost everything during the crisis and the “alleged” creators of the financial crisis are earning more now. This is why compensation of executives has been a subject of intense debate among regulators, the media and people during the last years.
2. What are the two sides on this issue, and which side do you tend to agree with?
In this issue we have two completely different opinions. On one hand, Stiglitz argues that compensation of executives should be subject to government regulation because he thinks that “regulation can help to better align the private rewards and social returns” (Taking sides 21). He focuses his argument on the recent financial crisis and how a deregulated market led the financial market to an excessive risk taking and to the failure of its roles: managing risk and allocating capital, what caused the financial crisis. He also argues that compensations were high before the crisis, when CEOs’ performance was “supposedly” good, but compensations were also high and even higher after the crisis, when all financial companies were in trouble because their CEOs did not do a good job. On the other hand, Kevin J. Murphy has a totally different opinion. He does not believe that compensations should be regulated and makes several arguments to defend his opinion such as that there is not enough empirical evidence to state that the actual compensation system leads to excessive risk taking.
In my opinion, Stiglitz’s view that compensations should be regulated is the better one and the one that I agree with because I think that the free compensation system leads to principal-agent problem and moral hazard. However, I also think that the regulation should be only made in the financial market because it is a private market but through the government safety net they use public money when they are in trouble.
3. What’s the economic argument that supports your side?
During the financial crisis the US
Show More

Related Documents: Econ: Economics and Principal-agent Problem Essay

Economics: Economics and Perfect Competition Essay example

Economics 1. An externality arises when one party directly conveys a benefit or cost to others (Png, 2007), a negative externality arises when one party imposes a cost on another, so the cost of producing a good or service is borne by others likewise a positive externality is when there is a beneficial effect on third parties from the decisions of consumers and producers. Externalities of the positive or negative variety create a problem in the functioning of the market to maximise the total…

Words 5083 - Pages 21

Essay on Prahinski Exam 3 Study Outline Spring

x $600,000/4000 units = $130 Should-cost pricing model – will be further described today, starting with the next slide. In this course, we will develop an in-depth understanding of should-cost pricing. ii. Should-cost model - (possible math problem and/or multiple choice) –similar to assignment #4 without data collection or BOM or cycle. 1. Assumptions Direct Material + Direct Labor + Factory Overhead = Cost of Goods Sold + Operating Expenses + Operating Profit = Should Cost Price 2. Purchasing…

Words 3986 - Pages 16

Essay on Weekly Course Outlines

in England International speculation and capital movements Long-term effects of the bubbles in England and France Attitudes toward banks and securities markets Regulatory stirrings 1 Some "Financial Revolutions" in emerging markets that became economic and financial leaders (in parens, authors who have studied these matters) Lydia (Turkey now), 7th-6th centuries BCE Coinage (Croesus, a Lydian king, became "rich as ....") Italian city states, medieval and renaissance Institutions: deposit/discount/exchange…

Words 3872 - Pages 16

Debtholders And Equityholders Essay

to The Journal of Legal Studies. http://www.jstor.org This content downloaded from 132.236.27.111 on Mon, 27 Oct 2014 00:24:34 AM All use subject to JSTOR Terms and Conditions DEBTHOLDERS AND EQUITYHOLDERS HIDEKI KANDA* I. INTRODUCTION the economic and the legal status of equityholdershas been WHILE much studied in the past, that status of debtholders has been poorly understoodin the literature.Recent ventures for restructuringcorporate capital incident to corporatetakeovers and leveragedbuyouts…

Words 7476 - Pages 30

What Is E-Store Loyalty

224 Bases of e-store loyalty: Perceived switching barriers and satisfaction George Balabanis a,*, Nina Reynolds b,1, Antonis Simintiras b,2 b Cass Business School, City University, 106 Bunhill Row, London EC1Y 8TZ, UK School of Business and Economics, Swansea University, Singleton Park, Swansea, SA2 8PP, UK Received 1 June 2004; received in revised form 1 April 2005; accepted 1 June 2005 a Abstract Loyalty, its antecedents, and its consequences have been considered extensively. Store loyalty…

Words 8811 - Pages 36