What is meant by the divorce of ownership and control?
a situation where although a firm is owned by its SHAREHOLDERS it is actually controlled by the firm's management (the board of directors, appointed by the shareholders at the annual general meeting to run the business on their behalf).
How do you mitigate the principal agent problem?
To try and overcome the principal-agent problem, the principal will have to spend money on monitoring and providing incentives for workers. “However, it is generally impossible for the principal or the agent at zero cost to ensure that the agent will make optimal decisions from the principal's viewpoint.”
What causes the principal agent problem?
The main reasons for the principal-agent problem are conflicts of interests between two parties and the asymmetric information between them (agents tend to possess more information than principals). The principal-agent problem generally results in agency costs. Expenses associated that the principal should bear.
What is ownership and control?
OWNERSHIP AND CONTROL: Ownership means that having legal title. Control means having the ability to determine use. Ownership and control generally come as part of the same package in a market-oriented capitalist economy. People buy a good, they own the good, they decide how to use it.