Theory of the Firm

Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.

Type

Journal article

Intellectual base

Primary research

Year

1976

DOI

10.1016/0304-405x(76)90026-x

Link

https://doi.org/10.1016/0304-405X(76)90026-X

Cited from

economics_finance, law_governance, military_strategic_studies, organizational_management, political_science

Cited by

10 citations across 10 artifacts.

Each citation links to the sentence it supports in the citing article.

Primes

• Accountability
  • A board cannot know whether a CEO's reported revenue decline is due to market forces or management incompetence—the canonical agency problem Jensen and Meckling (1976) formalized in terms of monitoring and bonding costs

    This sourceClassical principal-agent framework formalizing agency costs as monitoring costs (principal), bonding costs (agent), and residual loss

• Agency Problem
  • The construct was named and formalized by Jensen and Meckling (1976) and Ross (1973), though the underlying concerns appear in Adam Smith (1776) and throughout economic and legal history

    This sourceNames and formalizes agency costs (monitoring, bonding, residual loss) and relates them to ownership structure; the canonical principal-agent framework. SUPPORTS both the 'named and formalized by Jensen and Meckling' claim and the shareholder-manager Broad-Use citation.

• Authority Delegation Under Uncertainty
  • … might be delegated authority to "order supplies up to $5,000 per quarter," and the delegator knows roughly which contingencies will arise: pen shortages, equipment wear, seasonal demand fluctuations — the bounded-contingency picture that underlies Jensen and Meckling's (1976) classical principal-agent framework.

    This sourceCanonical principal-agent / agency-cost framework grounding standard delegation in a contractible set of contingencies

• Conflict of Interest
  • Principal-Agent Theory (Jensen and Meckling). In principal-agent theory, as Jensen and Meckling (1976) formalize, the agent (CEO, director, doctor) exercises delegated authority.

    This source(Annotation corrected — see flag.) Live-verified (ScienceDirect).

• Goal Congruence (Alignment)
  • The case illustrates that alignment requires changing actual incentives, not just messaging, and that properly aligned incentives can align individual and collective interest rather than requiring sacrifice

    This sourceFoundational agency-cost framework: divergent principal/agent interests generate monitoring, bonding, and residual-loss costs, aligned through incentive contracts and residual claims.

• Incentive Compatibility
  • .

    This sourceClassical principal-agent framework grounding standard delegation in a contractible, bounded set of contingencies and aligning incentives through monitoring and residual claims; serves as the baseline against which uncertainty-contingent delegation is defined.

• Information Asymmetry
  • Law and governance: Disclosure rules (securities prospectuses, food labeling), fiduciary duties, audit requirements, and discovery in litigation all exist to compress information asymmetry between principals and agents, firms and investors, or adversaries in a dispute.

    This sourceClassical principal-agent framework grounding standard delegation in a contractible, bounded set of contingencies and aligning incentives through monitoring and residual claims; serves as the baseline against which uncertainty-contingent delegation is defined.

Mechanisms

• Delegated Authority Charter
  • It is the instrument that keeps delegation from decaying into unaccountable agency, the classic hazard whenever a principal hands discretion to an agent whose incentives may diverge.

    This sourceDefines agency as delegated decision-making authority and identifies the resulting possibility that the agent will not act in the principal's best interests.

• Human Agent or Representative
  • Its failure mode is the principal–agent problem: the agent has its own incentives (its commission, its ongoing relationships with the counterparties) that can quietly diverge from the principal's, and because the agent controls the interface, the principal may not see the divergence.

    This sourceDefines the principal–agent problem around interests that can diverge between principal and agent.

• Local Partner or Agent Network
  • Quality varies, incentives can pull against the mission (agents cherry-pick easy transactions, or commit fraud), and the brand carries the blame for their conduct

    This sourceExplains that agency costs arise when an agent’s incentives diverge from the principal’s interests.

Verification

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