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Chapter 17: Q4. (page 672)

Professor Jones has just been hired by the economics department at a major university. The president of the board of regents has stated that the university is committed

to providing top-quality education for undergraduates. Two months into the semester, Jones fails to show up for his classes. It seems he is devoting all his time to research rather than to teaching. Jones argues that his research will bring prestige to the department and the university. Should he be allowed to continue exclusively with research? Discuss with reference to the principal–agent problem.

Short Answer

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The Board of Regents can be sighted as the principal here and Professor Jones or the faculty in general as the agent. Since Mr Jones is devoting maximum time to research, the University requirement of teaching is not getting fulfilled. This creates the principal-agent problem as Mr Jones is not getting paid for the research. Thus, either he should not be allowed to work on the research at all or should be hired as a researcher.

Step by step solution

01

Principal-Agent problem 

When a party (Agent) is hired by another party (Principal) to do some work per the needs of the principal, in return for some benefits promised before entering into a contract, a principal-agent relationship is formed. The problem occurs when the agent works according to their own interest, maximizing their own gains rather than the principal’s gains.

For example, an employee might put minimum effort to secure the monthly salary and doesn’t work efficiently, which can reduce the costs for the firm.

02

Explaining the answer using the concept of the principal-agent problem 

The Board of directors' preference here is to maintain a good quality of education which can be received by providing better quality education through fruitful teaching and research. Mr Jones is focusing only on the research, which he claims would bring prestige to the university, the quality of research cannot be accessed while it is still in progress.

The research is MrJones's personal endeavour. Since he has limited time resources, time given to research activities will reduce the time for teaching. This affects the student’s ability to understand things and learn, hampering the university’s goal of education. Thus, it creates the principal-agent problem.

The university will have to hire another teacher to give classes to the students and maintain the flow of teaching. This will not justify the salary of Mr Jones as a teacher. Thus, the university should hire Mr Jones as a researcher who can bring prestige to the university, as he claimed.

He should be allowed to work exclusively on his research but as a researcher only.

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Most popular questions from this chapter

To promote competition and consumer welfare, the Federal Trade Commission requires firms to advertise truthfully. How does truth in advertising promote competition? Why would a market be less competitive if firms advertised deceptively?

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c. If you were advising Harry, how long a warranty would you urge him to offer? Explain why.

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