Business Economics (Principal Agent Theory) Essay

Business Economics (Principal Agent Theory) - experiment ExampleIn fact analysts and the common people were surprised at the high risk undertaken by such big companies as Lehman Brothers Holdings Inc. In fact Bear Stearns Cos. was acquired by JP Morgan Chase & Co in spite of being the for the largest investment bank at one point of time. Experts have long criticized such overleap of foresight in risk taking. However one important factor which are not much brought up in the analyses of this problem is the compensation of executives especially those which are incentive based. As analyzed by the experts, years before this crisis took place, the executives undertook the long-term economic stability as a gamble to play with and rivet more on short-term financial gains. (Keller & Stocker, 2008) Understanding this issue might prevent future dangers and hence address the problem of bankruptcy by designing better compensation arrangements. The problem of compensation endure be analyzed with the help of illustrating the case of Lehman Brothers and Bear Stearns as depicted in the work The wage of Failure Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian A. Bebchuk, Alma Cohen and Holger Spamann in 2010.A panel of strain and policy experts resented this lack of focus on long term worth and steadiness and the stress on short-term benefits. The National Association of Corporate Directors (NACD) suggested that the focus should lie on performance-oriented compensation rather than amount the performance of the firm based upon stock prices. However the gap between such compensation and the encourage added to the American companies began to increase. In 2007 even when the mortgage crisis progressed further, the bonuses of Wall Street was at $33.2 billion, merely 2 percentage below the high levels of 2006. The fall of Bear Stearns shows the problems brought about by the inclination towards short-term success. (Keller &