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Overcoming Principal-Agent Problems through Incentives and Economics


Describe an example you have experience with of the principal-agent problem (for example, you have a desire for your children to listen in school and do well, while for them, goofing off at school might be much more fun), and explain how incentives can be used to overcome the principal-agent problem (such as paying your children for good grades). Include in your explanation an analysis of the risks in using incentives.

How will you be able to apply what you learned in this course to your current or future work?

The above questions are what my colleagues are responding to.

Read the 3 short student responses to the Discussion board post below.  All 3 are my classmates’ responses to the discussion board questions above.

Please reply to all 3 classmates post using A). at least 150 words and B). the instructors’ directions.

Please mention the products/goods my classmates used in their responses. Then reply with 1 substantive response paragraph.

Follow these instructions when writing your response.

When responding to your peers, praise them for what they are doing well, and lend your own information and/or perspective to your peer's discussion response. (All of your responses within the discussion threads need to be no less than six or seven full sentences in length and pertain to the Discussion Board Question/Topic, in order to be eligible for participation credit).

1. As a small business owner, I am finally getting to the point where I need to hire additional help to maintain the quick processing times my customers expect on the large volume of orders I am receiving. Usually, I pay my daughter to help me (she is 13). While she appreciates the "extra money" for helping out her dear old mom, the quality of my products usually suffers when she assists in making them. Of course, this is expected from a teenager. The principal-agent issue comes into play. I want to bestow upon my child early on...a good work ethic and understanding of where our money comes from.

So many kids believe money just grows in their parents wallets. To remedy the issues of hiring family for help and the affect it has on the quality of my products, I have incentivized my daughter in multiple ways. Using her own ambitions and goals, I have helped her to see how each and every facet of our production process is important.

Discussion Board Questions

I have also let her read negative reviews from customers who receive less than perfect products so she understands the consequences of poor product quality and how it affects our business in the long run. My daughter wants to open her own Etsy shop (she is a digital artist). In exchange for her hard work and working harder on attention to detail on my products, I have agreed to help her open her own shop when she has enough prints to stock it with (along with helping with setup, marketing, SEO, product photography, etc.). Incentives are a great way to overcome the principal-agent problem and our case is no different.

While she appreciated getting paid, this incentive was just not sufficient. It just resulted in her trying to finish the work as quickly as possible and making mistakes along the way as a result. When the incentive changed to consider her own goals and dreams (rather than just my own), her motivation and work performance improved drastically. While she only helps out a few times a month, I believe that while she is helping me, she also sees it as an oppurtunity to help herself. The same situation can apply to most employment relationships and other examples of principal-agent problems....and the same outcome can also be achieved.

Economics plays a huge role in our everyday lives. Being able to study the basics of economics helps us to understand past, future, and current economical trends as well as how those trends affect societies, businesses, governments, and individuals. As a small business owner, understanding economic trends allows me to have a better business model that caters to my customers and allows me to be successful. As an individual and consumer, understanding economic trends has also had a considerable effect on my life.

Look around you. Inflation is occuring all around the world as we speak. The housing market where I currently live has hit a record high (Myrtle Beach, SC) and I recently traded in my car for 3k more than I paid for it initially (due to high demand for used vehicles by consumers and a low supply). Understanding economics helps us make educated decisions as we navigate through a world that is fueled by our societal economies. This course has provided me with so much insight, and I have enjoyed the journey! Best of luck to everyone on their future endeavors and courses!

Part I

2. Currently, I manage a department in the hospital setting. I want all team members to be on the same page when it comes to efficiently managing their working time and not skirting their duties. I offer incentives throughout the year to keep the morale high and motivation forward moving. Incentives help because they provide rewards to attainable, short-term goals.

I have noticed that by offering two different types of schedules, four ten-hour workdays or five eight-hour workdays, team members are happier because they can plan personal-life events better, making them happier and more productive while at work. Recognition is also a big part of our department dynamic. Recognizing individual team members for a job well done creates team building and its own motivation to continue doing what is needed for departmental growth.

Sometimes incentives have the ability of back-firing. For example, say an incentive is a disposable good (i.e., a Starbucks gift card), one employee may value coffee or a specific drink from Starbucks while another sees the incentive as something they can go without. In this instance, one who loves coffee will try to obtain the gift card, whereas the other individual will not and will do less than needed. Not all incentives will work on everyone; that is why it is essential to make incentives multi-faceted.

Taking the information I have learned in Economics for Managers will assist me in seeing the value in services and products that I provide and analyze them against the market trends. I believe that I have a better understanding of expected value when making decisions, and I will apply this knowledge to future decisions in life and professionally. I will realize when asymmetric information sharing occurs and know some options for dismantling these scenarios in future work environments.

3. A principal-agent problem is when there is a conflict between the principal and the agent.  The principal is the person who delegates authority or responsibility to the agent.  The problem occurs when the interests of the principal and the agent do not align.
I manage a 911 call center and I have 20 communications operators that I am responsible for.  In the State of Ohio, 911 operators are required to be trained in emergency medical dispatching (EMD).  

This means that they are required to go through emergency medical protocols and provide emergency medical instructions such as CPR when needed.  Through our emergency medical dispatching program, we are also required to have a quality assurance team and we must meet specific standards on compliance to the protocols and customer service.  The majority of the 911 operators want to do a good job and want to be highly compliant and they strive to provide excellent customer service; however, I have a few that will only do the bare minimum in order to not get in trouble.

I have a specific employee that has been doing this job for 20 years and they have the knowledge and the ability to be highly compliant with the EMD program, but always skates on the edge of non-compliance but never quite far enough to warrant disciplinary action.  Our quality assurance team provides frequent training, positive feedback, and monthly incentives which motivate most of the employees; however, there are some that are just not motivated by incentives such as gift cards or candy bars.  

I can apply what  I have learned in this course will help me effectively collect, organize  d achieve clearly defined goals within my division and assist in the budgeting and procurement processes.

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