Page info: *Author:Mathiesen, H. *Document version:2.6. *Copyright 1997-2018, H. Mathiesen.Legal notice. 

Exhibition: The managerial agency problem


Introduction: In view of this figure corporate governance investigates how incentive mechanisms can help principals to get a return on their exchanges with the management. In terms of transaction cost economics, corporate governance deals with the institutions that may help to minimize the transaction costs of the managerial agency problem. Click here for alternative definitions.

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Examples of conditions, mechanisms and managerial transaction costs


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Transaction conditions


Incentive mechanisms


Managerial transaction costs



Environment conditions

     Asymmetric information

     Complexity / uncertainty

     Difficulty in measuring

     Asset specificity

     Duration / frequency


Behavioral conditions


     Bounded rationality

     Risk aversion




     Decision system

     Performance monitoring

     Incentive based compensation

     Bankruptcy system

     Ownership structure

     Creditor structure

     Capital structure

     Market for corporate control

     Market for management services

     Product market competition


     Monitoring costs

     Perquisite consumption

     Pet projects

     Free cash flow dispersion

     Hampered capital access

     Replacement resistance

     Resistance to profitable liquidation or merger

     Power struggles

     Excessive risk taking

     Self-dealing transfer pricing

     Excessive diversification

     Excessive growth

-Copyright 1997-2018, H. Mathiesen. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.Legal notice.