Define causality correct answers the relationship between cause and effect, X causes Y if three conditions are met
"Mill's Law"
Three criteria for defining causality correct answers 1. x and y correlate
2. x precedes y
3. change in x correlates with change in y
Why may correlation not be...
Relationship between managers (agency) & shareholders (principle)
In essence, owners pay money in
exchange for management expertise.
, Why does agency problem arise? correct answers Divergence of interest between managers and
owners (shareholders)
When managers don't maximize shareholder's interests
main agency problems correct answers 1) adverse selection
2) moral hazard
3) cognitive biases
Adverse Selection correct answers Managers may misrepresent
their abilities so that owners end up hiring less
capable managers
--Condition for adverse selection: information
asymmetry—owners do not have enough
information about managers
--Other examples: pizza buffets attract big eaters;
insurance companies attract accident- or disease-
prone applicants
moral hazard correct answers managers do not do what they
agree to do
--Condition: their interest diverges from that of
owners & information asymmetry about their
behaviors
(1) short-term view: managers tend to maximize their current gains instead of making long-term
investment
(2) seek higher compensation
(3) seek power and prestige
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