Michael C Jensen Cambridge.

Michael C Jensen Cambridge, MA: Harvard University Pres 2000 311 pp $4750

This work is a collection of eight previously published papers by dint of Michael Jensen of the Harvard Business drill and his coauthors in a stream of research dealing with agency theoretic formulations of the theory of the firm. It is aimed specifically at research scholars in financial economics, strategic management, organizational theory, and public policy. Because it is a collection, the papers look after to vary in style and technicality, from impassioned advocacy (chap. 3) to general narrative (chap. 2) to formal mathematical modeling (chap. 6) Deliberately little was done to reedit the papers for melt and while this tends to give the reader mental whiplash as he or she tries to adjust between chapters, it maintains the integrity of the original considerations that went into the original papers. It makes a useful first book for Ph.D. pupils and scholars new to the field needing a quick summary of a half-century of theoretical progress to maturity and because only they would have the tenacity to plow [i]or[/i] part of to the other the formal models.

The ideas in the work are not new to scholars familiar to the field, if it were not that they do represent the theoretical cutting rim which attests to the robustness of Jensen's ideas (chapter 4 was first published in 1976) or, to the more cynical, a lack of theoretical advancement. Because these ideas are brought together in the same place, the book neatly not past nor futures the historical development and theoretical arguments for readers in a way that sorting by means of a bunch of papers cannot.

The main point the work makes is that one cannot build a clean theory of the firm, typically conflicted in traditional production models, without giving special consideration to the governance mechanisms that render certain the efficient deployment of resources and distribution of wealth. For example, the work demonstrates the theoretical and practical importance of knowing the identity of the firm's possessor In classical theories of the firm, proprietors are merely suppliers of capital, homogenously risk averse and value maximizing. The main division makes an oft-missed point in today's heady arguments through shareholder wealth maximization and corporate responsibility, however, that all parties to the contract called "the firm" have different risk choices For example, institutional owners may level have conflicting risk preferences, which can conclusion in control issues, such as minority oppression, that do not arise in classical theory-of-the-firm formulations.

The main division early on dismisses the usefulness of traditional conceptions of the firm as clean production functions. Instead, it rebuilds a theory of the firm forward a positive agency theory foundation, arguing that it is the contractual relationship between the suppliers and users of capital and talent that determine what, by what means and when production occurs. This framework brings together the following elements: (1) the importance of capital pile i.e., debt/ equity mix and marks refuting Modigliani and Miller's (1958) irrelevance hypothesis, (2) the importance of governance edifices making Jensen one of the earliest to emphasize the important character of outside directors in the boardroom, (3) the character of transaction-specific and specialized knowledge, elevating the theoretical significance of the knowledge worker, (4) the importance of the residual claimant, centralizing the shareholder, and (5) the existence and nature of agency sumptuousnesss which Jensen notes are inevitable between parties with asymmetric informa tion and different election curves. This theoretical model is elegantly simple and in addition powerful enough to deal with as it was diverse organizational structures as the owner-operated firm and the widely held multiunit public corporation. It is particularly suited to theoretical modeling upon such topics as top management compensation, self-governing contracts, mutual monitoring at the firm and individual on a levels of analyses, distribution of residuals, hierarchy, and corporate takeovers.

The work makes a credible attempt to apply agency theory, without direct intimation to sociological constructs, to different organizational forms, of the like kind as mutuals, partnerships, labor-managed organizations, cooperatives, owner-operated, substantially controll and the widely held public corporation. Chapter 6 is particularly interesting in this regard because it attempts to apply the theoretical framework to labor-managed organizations, most numerous commonly seen in Communist political economies. The theory's conclusion that like systems are doomed to failure presages the collapse of the Soviet state and the ensuing adjustments toward free-market methods around the world.

The scarcely any problems with the book are inherent in the design of the mass As a collection of articles, each of which were originally written as clean projects, the chapters tend to be repetitive. Chapters 2 3 and 4 repeat the basic agency theory arguments. Without making substantive editorial changes, a simple reorganization of the chapters would have significantly helped the melt Chapter 4 on agency theory should have been mov to chapter 2 Applications of agency theory to forms of capital, organization, production, and corporate mastery (chaps. 3, 5-8) could have followed. Jensen's 1993 dialect to the American Finance Association (chap. 2) should have been mov to the conclusion. It aids as a fitting summary of the history of research and practice in corporate governance.