1976
Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
Why companies exist and why managers misbehave — the incentive math behind every org chart.
“We define the concept of agency costs, show its relationship to the separation and control issue, and investigate the nature of the agency costs generated by the existence of debt and outside equity.”
Agents, not machines
Managers maximize their own utility, not shareholder value by default. Agency costs are the price of delegation: monitoring, bonding, residual loss. Corporate structure is an incentive device.
Debt and equity as constraints
Capital structure is not neutral. Debt forces discipline; equity dilutes control. The paper treats the firm as a nexus of contracts, not a black box that "decides."
Incentives everywhere
The lens applies to any organization, including labs building frontier models. Who owns the reward function? Who bears the cost of failure?
- collection
Four papers that explain most of the economic behaviour you will see this week.
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More Is Different
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Structure and Interpretation of Computer Programs