Question

1. Restaurant staffare often paid below minimum wage and the difference is supposed to be made up in tips. Social norms imply that restaurant patrons should pay a minimum of 18% – 20% in tips. They can, of course, pay more than 20%, and there are no legal sanctions for paying less than 18%. Will restaurants have a manager – worker principal-agent problem? If so, how will they solve it?

2. Most professional sports teams are privately owned. Therefore, they cannot offer stock options to their employees the players. In Baseball (MLB) and basketball (NBA) most contracts are guaranteed, i.e., if a player signs a 13 year, $330 million contract, then he will be paid the entire amount even if performance falls off or if he gets injured. Do professional sports have an owner-manager or manager-worker principal-agent problem?

3. Stock options are often a part of a senior executive compensation, but not a part of the compensation for a regular worker. Please explain why stock options might not be an attractive incentive for regular workers of a firm.

Answer 1

1) principal agent problem arises as a result of information assymetry and it is more like a moral hazard. In the first situation if the principal ( manager) try to pay them in tips below 18 $ , it will ultimately lead to a problem. So it is important for the workers to have a concrete claim over the tips. This principal client problems can be done away with a trade contract . B) professional sports have been embedded with this problem. If they hire a player, they have to pay him , no matter whether he is fit or unfit , since the information regarding fitness is not perfectly available. So frequent contract renewals on a 2 year basis would enable the owner to ensure better results. C) A regular worker is only a wage earner , he is rendering factor services and is paid wages. He never contributes with any kind of managerial or marketing skills. In addition workers are too much in number to be compensated with stocks and ownership.