Question

Information technology, especially the use of networks, can help firms lower the cost of market participation, making it worthwhile for firms to contract with external suppliers instead of using internal sources. Similarly, technology, by reducing the costs of acquiring and analyzing information, permits organizations to reduce costs because it becomes easier for managers to oversee a greater number of employees. According to agency theory, __________.

Answer 1

Agency theory suggests that information technology improvements enable firms to reduce costs and oversee a larger workforce, affecting firm size and market competition.

Step-by-step explanation:

According to agency theory, improvements in information technology and networks can lead to cost reductions for firms by facilitating market participation and enabling managers to oversee more employees effectively. The advent of advanced telecommunications and the rise of information and communication technologies have made it possible for firms to manage long-distance economic connections more efficiently.

This has implications for the cost of production as technology allows for a variety of ways to combine inputs for outputs, often leading to substitution between labor and physical capital. The controversy revolves around whether this will result in a trend towards smaller firms with wider market access, or larger firms with economies of scale, leading to winner-take-all markets.

Answer 2

According to agency theory, a principal's and an agent's interests do not always coincide.

Step-by-step explanation:

An agency relationship is formed when "agents" (workers) are hired by a principal (owner) to carry out work for him.

However, rather than a homogeneous, profit-maximizing organization, the business is seen as a "nexus of contracts" among self-interested individuals.

Therefore, according to agency theory, a principal's and an agent's interests do not always coincide.