Date of Submission: Nov.

22, 2023

Name: ESPALLARDO, LYKA G. Course/ Year:BSAIS-A1

Course Packet # : 7
Module Name: Economics of Organization
Period Covered: Nov. 17-24, 2023

Worksheet no. 7
Due date of Submission: Nov. 27, 2023

Explain the following concepts.

1.Efficiency Wage

The traditional idea for determining wages is that an employee's pay should match the
value they bring to the company. However, if an employee is paid just what their
efforts are worth, and there are other job options available, the employee might not be
motivated to work their hardest or avoid actions that could harm the company. An
efficiency wage is a salary set a bit higher than what the employee's efforts are exactly
worth. This extra pay gives the employee a reason to work well and stick with the job
because they would lose the additional amount if they tried to find another job. For
the company, it's a worthwhile investment because it saves the trouble and costs of
hiring and training a new employee.

2. Principal-agent problem

 The principal-agent problem is a conflict in priorities between the owner of an

asset and the person to whom control of the asset has been delegated.
 The problem can occur in many situations, from the relationship between a
client and a lawyer to the relationship between stockholders and a CEO.
 The risk that the agent will act in a way that is contrary to the principal’s best
interest can be defined as agency costs.
 Resolving a principal-agent problem may require changing the system of
rewards in order to align priorities or improving the flow of information, or both.

What Causes the Principal-Agent Problem?

Agency Costs
The principal-agent problem happens because the boss (principal) can't always keep
an eye on the worker (agent). The risk is that the worker might not do their job well,
make bad decisions, or act against the boss's best interests, and we call these risks
"agency costs." It means extra costs for the boss to handle problems that come up
 Date of Submission: Nov. 22, 2023

because of what the worker does. These costs are like the price you pay to make sure
things work well between the boss and the worker.

Solutions to the Principal-Agent Problem

1. Contract Design
Addressing the principal-agent problem involves the principal taking steps to resolve
it. The responsibility lies with the principal to create incentives for the agent to act in
line with the principal's goals. Using the example of the relationship between
shareholders and a CEO, this means implementing measures to ensure that the CEO's
actions align with the interests of the shareholders.
2. Performance Evaluation and Compensation
Methods of agent compensation include stock options, deferred-compensation plans,
and profit-sharing.

In all of these cases, the principal has little choice in the matter. An agent is necessary
to get the job done.

3. Informativeness principle
- The suggestion that measures of performance that reflect individual employee effort
be included in employee contracts.

The informativeness principle, suggests that when designing employee contracts, it is

beneficial to include measures of performance that specifically reflect the individual
efforts of employees. This means that the terms of employment should not only focus
on general outcomes or overall team performance but should also incorporate
indicators that directly assess and reward the contributions of individual employees.

In practical terms, this could involve setting performance metrics or key performance
indicators (KPIs) that are tailored to each employee's responsibilities and tasks. By
doing so, the employee's performance evaluation becomes more specific and relevant
to their actual contributions to the organization.

4. Concept of signaling

When employers are hiring, they have a group of potential candidates. Some
candidates will do well in the job, while others may struggle due to a lack of skills or
the right attitude. During interviews, employers try to figure out which applicants
would make good employees, but this process isn't perfect. The true intentions and
abilities of a candidate often remain unknown until they've been hired and worked for a
while.
 Date of Submission: Nov. 22, 2023

Because of this uncertainty, employers face a challenge. To protect themselves, they

might offer lower salaries, even if they would be willing to pay more for a motivated
and qualified employee. It's a way for them to manage the risk of ending up with
someone who might not be the best fit for the job.

When a job seeker faces the challenge of being mixed in with other applicants, one way
to stand out is by taking actions that employers can easily see. For example, getting a
college degree is like sending a signal to the employer. Even if everything learned in
college might not directly apply to the job, the fact that the person was willing to put in
the effort and expense to earn a degree, especially if they did well in their studies,
suggests to the employer that this applicant is likely dedicated and capable. It's a way
for the job seeker to show they're a good choice despite the challenges of the hiring
process.

5. Tournament theory

In large companies with many top executives, especially those eyeing the position of
CEO, a common strategy is to pay the current CEO a hefty salary. This is often more
than what may seem reasonable based solely on the CEO's individual contributions.
The idea is that by offering such a high salary, it motivates other executives to work
harder in the hopes of becoming the CEO in the future. The substantial pay and perks
that come with being the CEO become a strong incentive for everyone to put in extra
effort. While this might seem like a lot of money for the CEO, From the perspective of
the shareholders, the gain from those collective extra efforts is worth the high salary to
the last winner of the CEO “tournament.”
 Date of Submission: Nov. 22, 2023

Name: ESPALLARDO, LYKA G. Course/ Year:BSAIS-A1

Course Packet # : 7
Module Name: Economics of Organization
Period Covered: Nov. 17-24, 2023

Worksheet no. 7
Due date of Submission: Nov. 27, 2023

Research:
Research for actual businesses that can be classified in terms of Value Chains. Give 1
example for each classification and describe/ explain why you think they belong to that
classification.

Horizontal Integration

 The merger of two companies at similar levels in the production supply chain is
known as horizontal integration.

 The transaction allows companies to expand their market share and cut costs
with synergies.

This growth strategy would involve buying a competing business or businesses.

Employing such a strategy not only adds to your company's growth, it also eliminates
another barrier standing in your way of future growth—namely, a real or potential
competitor. An example for a company who uses Horizontal Integration is the Jollibee
Food Corporation.
Jollibee Foods Corporation (JFC) is the Philippines’ largest Food Service business
and is continuously expanding its presence in foreign countries. Jollibee Foods Corp.
is merging its three wholly owned fast-food units; Chowking Food Corp., Greenwich
Pizza Corp. and Baker Fresh Foods Philippines; in line with efforts to enhance
operational efficiency.

Vertical Integration
 Vertical integration is where two companies at different stages of the supply
change join together to form one company.
 There are three types of vertical integration – backward, forward, and balanced.
 Vertical integration allows the company to control the distribution or supply of
its goods – allowing it greater control and efficiencies along the supply chain.
 Date of Submission: Nov. 22, 2023

Netflix
Netflix is known as a provider for streaming services – the end of the supply chain
where there is direct interaction with the consumer. It provides a platform for
produces of films, TV, and other content. However, the company was reliant on third
parties to provide new content that its subscribers would like. At the same time, it had
to pay a premium – particularly for big shows.
In 2013, Netflix decided to vertically integrate and enter the production business. So in
turn, it not only produced shows and films but also provides the distribution network
through its streaming services. This strategy has become vital as it has helped
differentiate it from competitors and control the type of shows that are made available.

Conglomerates

 A conglomerate is a corporation made up of several different, independent

businesses.
 In a conglomerate, one company owns a controlling stake in smaller companies
that each conduct business operations separately.
 Conglomerates can be created in several ways, including mergers or
acquisitions.
 The parent company can cut back the risks from being in a single market by
becoming a conglomerate diversified across several industry sectors.

AYALA CORPORATION-is one of the oldest and largest conglomerates in the

Philippines with business interests in real estate and property development, leisure
malls, banking, telecommunications, water, power, industrial technologies,
infrastructure, healthcare, and education.

●Ayala Corporation (AC), Ayala Land, Inc. (ALI), Bank of the Philippine Islands
(BPI),Globe Telecom, Inc. (GLO), Manila Water Company, Inc. (MWC), AC Energy
Philippines, Inc. (ACEPH), ACE Enexor, Inc. (ACEX)