Econ 1202 1st Edition Lecture 10Outline of Lecture 8 (Price Controls (continued)/Demand and Supply Application: Taxes/ Business and Corporate Governance)I. Price Floors in Labor MarketsII. Minimum WageIII. Policy ImplicationsIV. Impact of Qs>Qd if “prices” are suppressed?V. Who is or should be subsidizing the low-wage workers?VI. Types of TaxesVII. Economic EffectsVIII. Types of FirmsOutline of Lecture 9 (Business and Corporate Governance (continued))I. Who owns the business entity?II. Major Considerations of Organizational FormIII. Corporations: Limited Liability, Taxed TwiceIV. General Partnerships: Unlimited Liability, Taxed OnceV. Why is Ownership Important?VI. How is Production Organized?VII. Principle Agent ProblemVIII. Issues of Principal Agent ProblemIX. Corporate Governance: Principle Agent Problem at the Top LevelX. How is the Principle Agent Problem Solved?XI. Sources of Funds for Large CompaniesXII. Corporate (Financial) Capital StructureXIII. Capital (Financial) Market: Stock and Bond MarketsBusiness and Corporate Governance (continued)I. Who owns the business entity?a. The Owners of The “Equity”i. Corporations-Shareholders (dividends)ii. Partnerships-Partners (distributions)iii. Limited Liability Companies-Members (distributions)iv. Sole Proprietorships-Owners (net income)II. Major Considerations of Organizational Forma. Limited vs. Unlimited personal liability for ownersb. Taxation: “Pass Through”/Single vs. Doublec. Organizational FlexibilityIII. Corporations: Limited Liability, Taxed Twicea. Owners:i. Limited liability, but corporate profits are taxed twice (double taxation)ii. Corporate profits are taxed at the corporate level (Corporate Tax) and when net profits are paid out as dividends (Individual Income Tax=Special Dividend Tax Rate)IV. General Partnerships: Unlimited Liability, Taxed Oncea. Partnerships:i. General Partners have unlimited liabilityii. Subject to one tax (“Pass Through” to individuals)V. Why is Ownership Important?a. Owners receive the residual income from the organization (sometimes called the residual claimant)b. Why is this important?i. Creates incentives to organize and operate business in a manner that maximizes value of output to consumers while keeping production costs low.ii. Incentive is to organize production as efficiently as possibleVI. How is Production Organized?a. Contracting: separate contractsb. Team Production: workers operating under supervision of owner or owner’s manageri. Most businesses combine bothii. Issue: how do you get team workers to always work efficiently or productively without shrinking?iii. Are the workers’ incentives the same as the owners?VII. Principal Agent Problema. Incentives of Agentb. Incentives of Principalc. Problem: Agent may pursue his own interests rather than the interests of the principal that hired himd. Imperfect monitoringe. Imperfect (aligned) incentivesVIII. Issues of Principal Agent Problema. Monitoring Costsb. Asymmetric Informationc. Alignment of IncentivesIX. Corporate Governance: Principle Agent Problem at the Top Levela. Large publically traded corporations: owner’s typically don’t manage the team productionb. Separation of control (management) from ownershipc. Owners-Board of Directorsi. Often top management (CEO) sit on the Board of Directors (Inside Directors)X. How is the Principle Agent Problem Solved?a. Stock optionsb. More outside directors, less inside directors (less top management)c. Sell shares by lowering the price of sharesd. Private equity through activist investorsXI. Sources of Funds for Large Companiesa. Retained Earnings-how much money is in the bankb. Debt:i. Bonds-financial securities that represent IOUs or promises to repay; holders get interest payments.c. Equity:i. Stocks-financial securities representing ownership interests in the company; owners get dividends.d. Financial Security Investment-a document that sets forth the terms upon which the buyer of the security is willing to transfer money to the seller ofthe security.XII. Corporate (Financial) Capital Structurea. Debt (Lenders, Bondholders)i. Secured-lenders with liensii. Unsecured-lenders without liensb. How is debt created?i. Banks and other loansii. Issuance of bonds (or bills and notes)XIII. Capital (Financial) Market: Stock and Bond Marketsa. Primary Market-initial sale of stocks and/or bonds and the issuers get the moneyb. Secondary Market-reselling existing stock and/or bonds and re-issuers don’t get the money.c. Financial security interests are trades and have prices in the secondary