Agent pursues their own interests. Separation of Ownership and Control Firm owned by stockholders Stockholders elect board of directors Board of directors hire managers. Successful managers build reputation that is rewarded with higher compensation. Takeovers Ineffective managers face replacement through competition for corporate control. Entrepreneurs profit by buying stock, taking-over the board of directors, replacing management, and enhancing the profitability of the firm.
Incumbent management has incentive to be efficient.
Owners of franchises keep profits have incentive to be efficient. Company-owned outlets operated by employees. Many firms pay employees a share of revenues widespread use of tips and commissions used where productivity has directly impacts of revenues but little impact on costs. Piece Rates Paying employees a flat rate per unit of output. Encourages maximum output which maximizes income.