Principal Agent theory is the general problem of motivating one person or an institution to act on behalf of another. Principal hires an agent to carry tasks on his behalf. The agent thereby influences the welfare of the principal. The relationship provides a useful framework for analyzing situations in which there is asymmetric information and when there is a need to design a contract or monitor the behavior of parties. An example is when shareholders of an organization hire managers to run their business. The managers may have different goals from those of shareholders. For instance, managers may want to maximize profits and increase market share of the company. On the other hand, shareholders may want to increase returns. This creates conflict of interest. This conflict of interest is referred to as principal agent problem.
The agency problem needs to be solved. In trying to solve the problem, the principal may have to incur some agency costs. These costs include monitoring costs, residual loss and bonding costs. There are a number of solutions to the problem. For instance, managers contracts should specify their duty and responsibilities. Further, their performance incentives should be matched to outcomes. Secondly, the principal should closely monitor the agents. This can be done by reviewing their performance from time to time. Third, the principal may take adverse actions such as firing the management. Agents who are not working in line with the instructions of the principal may be fired. If the agents are doing a bad job, then the management may consider taking over the institution. Big investors of an institution can make these decisions. Finally, the principal may allow agents to own shares in the company. This can motivate them to work in the best interest of the principal.
Income and sales tax
The title of the article on the wall street journal is ‘measures aimed to end bias against long term jobless’. The unemployment rate in US has increased by 40% since December 2009. Therefore, various stakeholders were concerned about soaring situation. The government was considering creating a class of employees who are protected from the dynamics of the labour market. However, this faced a lot of criticism from the private employer. They argued that the government cannot legislate on how to hire and the terms of employment. However, economists suggested that there was a need to change the tax legislation. They stated that making favorable legislation on income and sales tax would create incentives on employees. It will also motivate them to work harder because they will have more disposable income.
Fiscal policies are important tools for solving income inequality problem. Governments trying to regulate income disparity should use direct taxes such as income and sales tax. Therefore, legislations that create a favorable taxing system to the poor will help reduce income disparity.
Income inequality denotes the disparity in distribution of income. It captures uneven distribution of income. It is the difference in income between the rich and the poor. In the US, the disparity in income widens as you move up the income distribution. The problem started in early years, as early as before the First World War. The gap has grown and become bigger. Income inequality is caused by a number of factors. Some of the social factors include work experience, inheritance, race, and gender among other factors. In addition, technology and globalization have largely faced out a number of small businesses thereby increasing the disparity. To some extent, imposition of taxes has also contributed to rise of inequality. This is because tax burden is felt more by the poor than the rich. The income inequality in the US is deeply soaring. Various stakeholders are worried about the bad trend. The issue needs to be addressed to ensure that the trend does not continue. A major consequence of income inequality is poverty. In the US, poverty became a key issue for economists. There is an increasing number of people living in poverty. Therefore, it is of essence to reverse the trend by solving the income inequality problem. A number of measures can be taken to solve income inequality. They vary from long term or short term measures. The government can use fiscal policies to solve the problem. This may entail implementing new tax rules which should tax the rich more than the poor. The government can also strengthen workers unions. These unions help in fighting for better employees’ rights. If the unions are strengthened and their recommendations are implemented, then they may help in reducing the income gaps.
There are a number of problems associated with income inequality. First, inequality leads to social problems such as high crime levels, riots and strikes by workers among other societal evils. Further, inequality results in unemployment. Unemployment is considered as inefficient allocation of resources. A key way to address poverty is though empowering people. The nation can be empowered to end the vicious cycle. This empowerment can be through injection of resources and capital. It can also be through education to help the nation cope up with speed of changes in technology.