Question

Explain how each of the following affects the optimal method of acquiring an input. In each case, be specific about the method of acquisition and provide explanations. a) A complex contracting environment b) A specialized investment c) Opportunism d) Bargaining costs e) The costs of bureaucracy f) Gains from specialization

Answer 1

The optimal method of acquiring an input describes the transaction cost and the specialized nature of inputs being procured. To avoid the principal-agent problem the plan should align the interest of the agent with the principal.

a)A complex contracting environment: in this the owner and the contractor work on the risk associated with the contract. this requires both owner and contractor must be innovative to take the risk associated with the contract. so here the relation is clear and both party welfare-oriented.

b) A specialized investment: This is also related to the optimal method as the investment is specialized so the contractor ort the investor is very careful and proactive to analyze the effectiveness of the investment.

c) Opportunism: This is one of the stages which explain how optimally utilize the opportunity in the benefit of both principal and investors.

d) Bargaining cost: This cost is most significant for the investor as he is going to deal with the process along with the principal and the deal should not bias one. it should be or the idea should win-win strategy for both of them.

e) The cost of Bureaucracy: these types of costs mostly associated with the concept of minimizing the costs of regulation and transaction with the legal environment. in all these, the principal and the agent should not forget their main aim.

f) Gain from Specialization: it is associated with an acquiring deal where the changes in the statements can put anyone into trouble in terms of business profit. When there is an acquisition which implemented with a specialized structure, will always provide a better solution to both principle.