fb11001_bounded rationality &moral hazards

8/3/2019 FB11001_Bounded Rationality &Moral Hazards

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Akshay S Bhat (FPM-1) - XLRI Jamshedpur - FB11001- MANAC II (Term Paper)Summary of Understanding and Synopsis on the Topics of Bounded Rationality & Private Information and Moral Hazards & Performance

Incentives

Bounded Rationality & Private Information

The chapter perambulates over the topics of Bounded Rationality with the initial emphasis of

the topic being given to Motivation 1 , in addition to Coordination the other central problem to

any Economic Organization and Management is Motivation , Motivation problems arise

because individuals have their own concerns and interests, which are rarely perfectly aligned

with the interests of other individuals, to the intra and inter groups to which the individual may

belong to and the society as a whole.

The Coordination problem deals with the following things under its ambit : a) What

deliverables are to be met b) How they should be achieved and c) What key deliverable each

individual must deliver, at the macro organizational level the problem is who makes what

decisions and with what pertinent and relevant information the individual possesses to make

those decisions and how readily the required information is made accessible, whereas the

Motivation Problem is to ensure that that everyone involved in the team willingly does his

part at the individual level and accurately delivering feedback of the outcome of the task which

they are doing in order to ascertain to the decision maker that he can take appropriate

decisions, also it is key that the individual who is assigned the task carries it out himself in the

planned manner by the decision maker.

To explore the topic in detail assumptions that individuals will do what they perceive to be in

their own individual interests is given importance throughout , this amalgamates into informing

us that not only is the decision maker privy of how he is affected but also how others are

affected by decision taken.

The chapter further elucidates the importance of Contracts 2 , which are prima facie

agreements made by two or more people which are voluntary in nature a nd accepted by both

the parties entering into a contract when they both see their advantage, which on furtherdecomposing will be seen to be mutually beneficial as well , more so these contracts which

have been entered into can be modified to suit individual needs and interests.

1 Definition of the word Motivation is as per the assigned topic paper Ch. 5 Page no 126.2 A Contract is as per the economic definition and may not necessarily be formal contracts with the power of law behind them.When people recognize their mutual interests and agree to modify their behavior in such a way that it will be mutually beneficial.

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So to deal with the problem of Motivation, it is expressed that a perfect contract, henceforth

called a Complete Contract would be impervious to solve the problem, a complete contract

would specify all sets of actions each party is liable to and arrange the realised costs and

benefits in case of all foreboding contingencies . This is concomitant that both parties are

inclined to abide by the contract terms. So this elucidates that if the original plan were an

efficient one, a complete contract would implement an efficient outcome, therefore with this

idealised mind-set we find that Motivation Problems primarily arise because some

contracts cannot be described in a complete and enforceable contract.

Therefore, a complete contract would need the following requirements.

a) Firstly , the parties must have the foresight to see all relevant contingencies whichwould creep up and how they will adapt to the problems which arise, they must be

unambiguous, also which factors were considered and which are actually beforehand.

b) Secondly, the parties entering into the contract must be able to determine and agree to

an efficient course of action for each possible contingency.

c) Thirdly, The parties entering into the contract must abide by the terms, this has two

elements namely C1) First the parties must agree that the contract cannot be modified

later which would rob the initial contract of its credibility , C2) Each party individually

must be able in its own accord to judge if the contract terms are being met and if theyare being violated by the other enforce the contract terms on the other.

The chapter further explains the problems of actual contracting w hich are limited (Not all

contingencies are fully accounted for ) by the problems of: Limited Foresight, Imprecise

Language, Costs of calculating solutions and the costs of writing down a plan –

collectively called as the BOUNDED RATIONALITY of people during actual transactions

among people. Therefore in such cases when there are contracts with what probably we can

assume are loose ends or rather incomplete contracts arising because of the problems of bounded rationality we can expect that when parties try to adapt in case of contingencies and

incomplete contracts they may give rise to opportunistic behaviour a mongst the parties

including reneging, this nagging fear of opportunism may at times deter parties from relying on

one another as much as they should for efficiency , such incomplete contracts may further lead

to problems of imperfect commitment and hence reluctance to enter into a contract.

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In certain cases, even if the contingency can be seen and planned, and contractual

commitments enforced, one of the bar gainers may have relevant private information before

the contract is signed, this private information interferes with the possibility of reaching a value

maximizing agreement, E.g. it is lead to believe that sellers have relevant information about

the product that they are selling in a second hand market because they believe that the

product utility is now minimal and are interested in disposing it off to the sceptical second hand

buyers, this leads to inefficiency , the Source of Inefficiency is called ADVERSE

SELECTION.(Sellers are adverse to the interests of the buyers). In reality real contracts

are seldom perfect, leaving room for self-interested behaviour that will thwart the realization of

effective plans.

In reality all possible outcomes of a contract cannot be described in detail, the idea of foreseeing and unambiguously describing every contingency that might possibly be relevant to

the agreement is not possible in the complex environment. In reality real people are subject to

Unforeseen Circumstances as the outcomes could not be looked into with adequate

foresight during the planning phase, Costly Calculations and Contracting sometimes the

management looks at the positive side of an outcome and often neglects the other possible

outcomes as the opportunity cost of calculating this second outcome would hamper more

productive work, it is only when the plan is put into execution and the second outcome which is

actually against the managements interest comes into prominence gives rise to theidentification of loopholes in the original contract. Imprecise Language can hamper the

outcomes and efficiency of most contracts, furthermore simply adding more clauses and

subdivisions in the contract too can make disputes more likely.

Contractual Responses to Bounded Rationality : Can be looked into with an angle that

people design their contracts recognizing that they cannot possibly be perfectly adapted to all

possible future outcomes; one such solution is to write rather inflexible contracts with

blanket provisions that are to apply very broadly . A broad blanket provision minimisesthe cost of describing eventualities and leaves little room for ex post uncertainty about what

behaviour is required . Such spot transactional contracts are called SPOT MARKET

CONTRACTS. They include A) Relational Contracts in which the parties do not agree to the

detailed plan of action but on a larger goal and objectives, on general provisions that are

broadly applicable and the plan of action as to what should be done when contingency arises.

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And the power distribution amongst the parties involved in the contract. B) Implicit

contracts which do not have any document as the mutual expectations are shared

between the parties and are commonly used with this they can be powerful means to

economise on bounded rationality and contracting costs, therefore shared values, ways of

thinking and belief as to how things must be done are key aspects of shared contracts. A

natural drawback of implicit contract is that by their very nature they cannot be tried in a court

of law as there is no formal contract.

Effects of Contractual Incompleteness: Contracts are meant to protect people by aligning

incentives, when contracts are incomplete, the alignment can be imperfect, therefore the

concern with the possibility of being disadvantaged by self-interested behaviour that an

incomplete contract does not adequately control or may prevent an agreement from beingreached in the first place. It may also inefficiently limit the extent of cooperation being

achieved.

A) Commitment and Reneging : Achieving commitment can be very valuable because it

can affect others expectations and at the same time lead to the modification of their own

behaviour, this is illustrated by an example that when apple launched a special range of

Macintosh Computers they installed a standalone plant producing the apple range of

computers. This lead to the behaviour modification of a) Employees: they knew they hadto succeed b) Competitors: they felt there would be little point to drive apple out of the

market when they had dedicated themselves to a cause and c) Customers: when they

saw this much publicised move by apple they knew that they could count on its support

and hence would have preferred an apple mac over any other PC.

B) Commitment Problem No 1: Reneging , is especially problematic with incomplete

contracts because what should be done is often left incomplete some self-interested

actions may be adopted by one party who takes advantage of the loopholes, the other

party in contract with it may complain but may not have the power to label it a cheat asthe first party may say that it is carrying out this action as per the agreed terms which in

totality is incomplete. Thus reneging not only impedes efficiency but also affects

performance.

C) Commitment Problem No 2: Ex Post Renegotiation is a rather subtle problem

because in some cases it will be rather beneficial for both parties to renegotiate

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the ex post b ecause what was efficient when the contract was first entered into may

not be the same now after actions have been taken and further information revealed, if

parties understand this at the time of crafting the original contract document they will

later face these incentives, they may not be able to draft the contract in an efficient

manner. Viz stock options to motivate employees to raise the stock price of a company

(vis a vis current market price) is exercised by most companies as an incentive to

improve and motivate employee performance. Suppose after issue of this statement the

stock price falls drastically, the employees would be demotivated, and thus the contract

terms if remediated would be better for the employer and the employees to increase

efficiency at work.

A complication of Ex Post renegotiation includes, is that in some contexts it willturn out ex post that breaching the original contract terms will lead to more personal

gain for one of the parties, and it insists on inefficient functioning of the initial contract,

viz a chain and a manufacturer enter into a contract of producing a few goods, but later

the manufacturer finds more lucrative opportunities and breaches the initial contract

with the manufacturer by paying damages when the chain may insist on delivery after it

had entered into a contract.

Investments and Specific Assets: An Investment is an expenditure of money or otherresources that create a potential flow of benefits and services, the potential flow is itself called

an asset. Tangible assets like houses, machinery are the most commonly identifiable assets

also; investments in education create a valuable asset: Human Capital which also leads to

cash flows and benefits. But Specific Assets a re those, which are most valuable in a specific

setting or relationship . A parallel can be drawn with the term Cospecialized Assets 3 , which is

used when two or more assets have maximum value when used in conjunction and lose much

of their value if used in isolation. Viz A rail road which ply’s between a coal mine and an

electric utility , also these two assets (railroad, coalmine) lose value if isolated and gain a lot of value when used in conjunction, also there is a problem of a selfish motive develops between

any one of the owners of either assets as the other will fall vulnerable to meet the demands

which are post contractual in nature, a classical term for this is called the HOLD UP PROBLEM

(Which is an example of post contractual opportunisms) in this the general business

problem is that each party worries about being forced to accept disadvantageous terms later,3 Cospecialized Assets are a subset of Specific Assets.

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after it has sunk an investment, or is precarious about its investment being devalued at the

actions of others. A party which is forced to accept this worsening terms after it has incurred

sunk costs is called a Held Up company.

This leads to conclude that it is the specificity of assets together with imperfect

contracting that leads to the hold-up problem , which is not a common occurrence it

applied in the standard market context where this is perfect contacting in an ambit if a large

number of buyers and sellers, but rather the opportunistic behaviour that develops in the

players who have invested in large specific assets and either make or are rendered vulnerable

to the other dependent member who is in contract with it.

Clearly if the contracts were made complete, with the contract preventing either of thepartners from indulging in a post opportunistic behaviour: the hold-up problem would be

eliminated, but with an example a concept is highlighted. Suppose that there is a contract

between a mine and an electric utility to supply coal, these two facing the expected

contentious problem of HOLD UP : why? B ecause it may later arise if either of the partners falls

prey to its selfish desires and breaches the contract, to prevent this post opportunistic

behaviour a long term contract is entered into by the mine and the utility, but for this the price

of coal should be set, now the question arises at what price? Hence the contract the coal mine

owner may face rising labour and other costs which he does not expect, for this should anescalator clause be included which adjusts the price of the coal when some mining index cost

rises, or should the price of coal be tied to the spot market price of coal in that particular area ?

that is why when faced with such scenarios we have a strategic solution, in an empirical study

carried out by the noted MIT Economist Paul Joskov , most Coal Mines and Power utilities were

owned by the same company (Vertical Integration 4) or had entered into contracts with each

other which were of a long term in nature and had escalator clauses. A mathematical example

of the hold-up problem is the famous prisoner’s dilemma problem 5 , also this opines that the

threat of breach of contract and the hold-up problem, concern that post contractualopportunism may occur, depresses and discourages a firm from investing, therefore it is

quintessential that firms must commit not to attempt and grab more than their

share of returns.

4 When a company expands its business into areas that are at different points of the same production path.5 The problem has not been explained in this term paper but will be explained during the Viva.

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Achieving Commitment: t he term paper in its beginning has already illustrated the relational

and implicit contracts as a response to contractual incompleteness, where these contracts

serve to set expectations and establish decision processes to deal with inevitable and

unforeseen circumstances while avoiding the trouble to jot inundated details. And in the case of

cospecialized assets it is best for the same firm to own both, or the other solution is one which

is called COMMITMENT. And in a world of costly and incomplete contracting trust is utmost

important in realizing transactions which are important and which may be profitable, thus in

reneging or breaching a contract the firm loses its reputation, thus losing the chance to

conduct transactions later on. Thus the tenacity to maintain a reputation by a firm

removes the incentive for behaviours which are opportunistic and post contractually harmful to

the transactional partners of the firm.

Private Information and Precontractual Opportunism: The parties committing to get

involved in a contract before entering into the contract must reach an agreement, this involves

some sort of bargaining, which in itself is a complex process, central to economic life, and has

distinct features as bargaining strength, credibility, guile, patience and strategic insight. Also

when costs and benefits of a certain plan are known to that party alone, it leads to what we

term as “Informational Asymmetries” . Informational Asymmetries can prevent many a

agreement from being reached. Under such conditions even if an agreement is reached, it is

not going to be an efficient one, especially when the parties have no option but to participate.At times, informational asymmetries lead to problems in true valuation, which can only be

curbed when both the parties confess to the true value of the transaction that they are

engaging in thus to ensure that trade takes place and both the buyer party and the seller party

gain a bit of surplus from the trade which they otherwise are not only forced not to carry out

but also won’t do if there is ambiguity in valuation ( arising from slanderous misreprentation in

the true value of the product being transitioned in the contract ) each confess to. Albeit

Efficiency can be achieved despite the inefficiencies when there are incentive constraints,

important to bilateral bargaining and trade takes place when gains for both buyer and sellerare large. The costs associated to reach a mutually beneficial agreement, time and effort

imposes the phenomena of Bargaining Costs.

Adverse Selection: Adverse selection is one of the major problems of pre contractual

opportunism it arises because one of the parties has hold of information which may

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not be explicitly mentioned to the other during the agreement of the contract and the

contract is being entered into because of one of the vested interest of one of the party with the

Precontractual information . Such private information can also block the efficient functioning o f

any contract, Viz. when a pregnant lady takes benefit of an insurance policy she has pre

contractual information and a selfish interest to maximize her gain in the transaction, she may

not openly declare the same during the agreement of the contract and later on post contract

she may claim for medical benefits and this puts the insurance company which had no privy

about the state of the lady when the contract was entered into.

Signalling and Screening But we have to be cognizant of the fact that private information,

responsible for adverse selection can be extracted by investing time and effort which consume

attention and are costly to the firm expending these efforts. But there is a caveat here, thatthere are limitations and the contract albeit with a lesser degree is still prey to informational

asymmetries. In Signaling , privately informed parties take the lead in adopting behaviours

that when properly interpreted reveals the information, viz workers may show that they are

more productive by either more productivity or else by studying and earning college diplomas

and the degree would be a signal for productivity. On the other hand Screening refers to the

activities being undertaken by the party without private information in order to separate

different types of the informed party along some dimension

Moral Hazards & Incentives

The problems that most decision makers in organizations face is that when those with critical information

have interests different from those of the decision maker they may fail to report completely and

accurately which are needed by the decision maker to make good decisions.

This scenario also applied when buyers cannot easily monitor the quality of goods and services that they

receive; there is a tendency for some suppliers to substitute poor quality goods or to exercise little effort, care

or diligence in providing the services. This can be illustrated in the form of an example that when a mechanic

cheats us when we go to him to service our car for an engine problem and since we are ignorant about the

intricacies of the engine, we are susceptible to be cheated by the mechanic, he may replace an inferior part for

an already existing part which would be otherwise functional, or even if genuine he may not care to do the job

with utmost sincerity, so much so that we may run into a problem again and spend time and money which

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could have been otherwise invested into another productive activity, this scenario is a typical example of the

MORAL HAZARD problem. The Moral Hazard problem is a form of post contractual opportunism that

arises because actions have efficiency consequences that are not freely observable and so the person taking

them may put his or her private interests at others expense.

This term, Moral Hazard had been originally extracted from the insurance industry, when people had changed

their behavior after entering into a contract with the insurance agency, the change in behavior had an

incongruous effect on the Insurance Agency when more claims were being filed against the insurance agency.

We have discussed the problem of not being able to write down complete contracts with an enforceable

behavior that is to be adopted by both parties after the contract has been entered into, therefore “enforceable”

contracts cannot be written down.

Although the term Moral Hazard at first impression gives a negative outlook, not all changes in behavior that

are accompanied are socially undesirable, because some social interests may not be represented in the

transaction between the insurer and the insured, E.g. A Pregnant lady may go to the doctor for regular

checkups this although may be of negative impact to the insurance company, it is consistent with society’s

goals , there will be healthier babies and mothers, also it may be interesting to note that the costs involved in

going to the doctor by the woman may exceed the total benefits received.

The Moral Hazard problem can be looked into with the help of the following example, a divisional executive

may look into his short term gain of achieving perks and promotions and sacrifice crucial long term goals of the company and shareholders’ interests, a doctor may practice conservatively and may tell his patient to carry

out all kinds of prognostic tests before administering any kind of medication on him. Albeit these examples do

not have the propositions of a formal insurance, they have a crucial feature of insurance, the decision makers

have the crucial feature of insurance, and the decision makers the Manager and the Doctor do not bear full

impact of their decisions. Viz. the doctor who orders extra tests benefits in terms of the reduced likelihood of

malpractice suits against him, but does not pay for the costs of the tests or suffer the discomfort that they

cause. We can extend this example into the PRINCIPAL AGENT RELATIONSHIP where situations in

which one individual (agent) acts on behalf another (principal) and is supposed to advance the principals

goals. In this scenario, the moral hazard problem arises when the agent and the principal have different

individual objectives and the principal cannot easily determine the agent’s reports and actions are being

taken in pursuit of the principal’s goals or self-interested pursuit of the agent. In the above examples of the

manager and the doctor can be stated in the principal and agent context that the agent in both cases are the

doctor and the manager and the respective principal are the patient and company shareholders.

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We now explain Moral Hazard in organizations, prima facie Moral Hazard was identified in the insurance

context and most of its spectacular manifestations are still found there, however for understanding

organizations however we have to acknowledge that moral hazard is a common phenomenon and it affects a

wide array of transactions and attempts to deal with moral hazard accounts for many of the institutional

arrangement we see in the markets and the organization.

Moral Hazard and Employee Shirking : An important instance of moral hazard arises in employee

relationships, where employees may shirk their responsibilities, where an employee albeit doing his work at a

congenial pace will try and portray an image of being overworked and also that he is going about his work at a

decent pace when in reality he could have done the work faster and better, so to annul this problem,

management in most organizations incentivize the worker into bringing about his best performance, these

arrangements tie employee compensation to various measures of performance which are supposed to motivate

effort, creativity, care, diligence, loyalty and so on. Examples to enhance output include commissions to sales

people, performance pay to executives and son on.

We can very well see that these are arrangements of Moral Hazard, why? Because the firm is not paying

directly for what the employees are supplying but are using a proxy for it. What is actually being supplied are

things such as employees intellectual and physical effort and what is paid for is the result of these efforts the

amount and quality of time invested by the worker may be difficult to monitor, but the results of the efforts

are more conspicuously observed, thus rather than paying for unobserved work, the firm incentivizes theworker in turn motivating him and bringing about a behavioral change and making him work in the desired

way which enhances the value of the organization.

Moral Hazard and Managerial Misbehavior : The dispersed holdings of stock amongst a multitude of

small investors and the election of a board of directors to control the interests of the shareholders had created

an effective separation of ownership and control, and an agent and principal relationship when no individual

stock holder had any real incentive to monitor managers and had to believe that the Managers were running

the firm keeping the stockholder interests in mind, but over time in certain organizations we find that the

managers had supplicated their own selfish interests with an array of perks and exorbitantly lavish setups,

more over in an array of critiques one of them also included an attempt to resist takeover plans because they

were aware of the fact their jobs could be in danger if any takeovers take place (successful hostile takeover

bids have generally seen the senior management of the firm being taken over, sacked) which otherwise would

have been very beneficial to the shareholder value, clearly this is a case where there is a conflict of interest

between the shareholder and the managers of the firm. One such feature of a takeover defense is the Poison

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Pill, which involve the creation of special securities that give certain right to the holders in the event of a

hostile takeover and if the raider owns up more than a specified fraction of the firm leads to the loss of the

firm which is acquiring. Such poison pills clearly outline the Moral hazard, in which the Board acts against

the interest of the shareholder.

Moral Hazard in Financial Contracts: A common sort of moral hazard problem arises when different

individuals have differing claims on the financial returns from an investment, and Moral Hazard examples are

abound with other examples and account for the many accounts in the form of Financial Contracts. Between

equity and debt holders equity holders would like their investments to work out and generate more value

whereas debt holders would like to get their promised fixed payment

Controlling Moral Hazards: The three main reasons to prevail for a moral hazard problem to arise are

Firstly there must be potential divergence of interest amongst people, conflicts of interest may not always

arise, but when resources are scares it will, so this aspect is contextual. Secondly , there must be some basis of

gainful exchange or cooperation between individuals, some reason to agree or transact that may later on lead

to divergent interests and the Third critical requirement is that there must be difficulties in determining

whether the terms of agreement have been followed or not, and also in reinforcing contract terms by one party

over another, this point can also arise when both parties know that the contract terms have been violated but

cannot be individually gauged by a third party. These difficulties also arise because monitoring actions or

verifying reported information is costly or impossible.The following three ways suggest ways to deal with moral hazard problems:

Monitoring : Increase the resources devoted to monitoring and verification, the underlying idea is to prevent

inappropriate behavior directly by catching it before it occurs, Viz in the doctors and patient problem which

we have discussed earlier, before carrying out a test which the patient or insurance agency opines would be

irrelevant, the patient can consult a second doctor. In other situations monitoring is intended to decrease the

probability of getting away undetected with the socially inefficient and self-interested behavior, in this case

the basis of dealing with the problem is by the nature of introducing rewards and penalties, Viz a penalty is

that a punch card system may be introduced and if a worker punches a card late or comes late to work, a

punishment in the form of reduced pay can be imposed, Monitoring may also appreciate the need for a

desirable behavior by rewarding a person for an appropriate conduct.

Monitoring by Competing Sources of Information , Although monitoring requires developing sources of

information about the agent’s truthfulness and performance it is not incumbent upon it from a cost

perspective, a prime possibility is to rely upon competing sources for information to develop the much needed

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information, and each of the competing sources will point out their own merits and the D merits of the others

another method is Monitoring by Markets where managers strive to give in their best effort in order to avoid

a bad reputation in the market and an accompanying fear of unemployment, this fear may provide managerial

incentives. The problem of Risk Bearing amongst Risk Averse people is that they will be needed to be

convinced by the management to accept a higher pay, this in turn is costly to the organization, when it is

forced to use the incentive method to convince people to accept the risks.

Risk Costs and Incentive Benefits: Designing Efficient Incentive contracts involve balancing the cost of risk

bearing against the benefits of improved incentives. Quintessentially the basic idea behind incentive contract

is that of achieving goal congruence, an appropriately designed reward system causes self-interested behavior

to approximate the behavior the designer wants. Alternatively we can think of a well-designed and planned

incentive and performance scheme as removing the conflict of interest by effectively aligning the goals of the

Principal or the organization or the designer with that of the agent, or Manager.

Bonding: In certain industries it is common to require the posting of bonds to guarantee performance; a bond

is a sum of money that is forfeited in the event of any inappropriate behavior by an individual under the bond.

But in many cases a bond will have to be sufficiently large to provide an incentive when the chances of

getting caught are small and the incentive to cheat is large, and most often individuals who need to be bonded

may not possess the tenacity and resources to take up that bond.

The Chapter further illustrates the Ownership Changes and the Organizational Redesign by eliminatingthe agent, and having principles acting on their own behalf, but a caveat accompanies this as seldom can

we be our own doctors and it further annuls the gains of specialization. Furthermore in Market settings,

changing ownership patterns to bring the affected transitions can eliminate the moral hazard problem as

discussed in the summary of the Bounded Rationality problem when it is better for a firm to acquire another if

both are a dependent on each other, and can possess some sort of divergent interests later (the Mine and

Utility Problem)

Influence Activities and Unified Ownership is describes as one of the other major categories in the problem

of moral hazard is the one of influence activities, they arise when the employees (can be agents) also try to

influence the employers decision (Can also be Principals) even if the decisions of the decision maker are not

altered and he or she goes by the privy of his decision the time and effort by the ones other than the decision

maker spent in influencing him can be of insignificant gain and leads to loss of productivity, Influence costs

can be eliminated by the imposition of organizational rules and structures which are well defined and have a

significant employee reporting directive. Influence Costs can be further eliminated when there is no decision

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making or influencing power with those who consume their productive time in unproductive work when they

try to influence the decision maker who stands rather unbiased and will take his own decision irrespective of

the others trying to influence him. We see that in the organizational context that when two previously separate

organizations are brought under a common central management with the power to intervene, the scope of

influence increases with the members of one organization pleading for the resources of the other organization

be transferred to them. Further the chapter concludes relating influence costs and Failed Mergers that major

problem creep up as each organization has its own structure, policy, pay scales, organizational issues, thus in

business conglomerates each division must function independently with the central leadership selectively

intervening when there are clear gains of doing so this can also be brought about by creating separate

boundaries and legal system between divisions.

End

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fb11001_bounded rationality &moral hazards

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