Subsistence Theory of Wages: The Subsistence Theory of Wages, also known as the "Iron Law of Wages," was an alleged

law of economics that asserted that real wages in the long run would tend to the value needed to keep the workers' population constant. According to this theory, wages are tend to maintain the evel just significant to maintain the workers at the minimum subsistence. If the level of wages rise above the sussistence level. So the supply of labor become high in mnumber or large. The supply of labor brings wages downward to maintain the subsistence level. If the wages falls below the subsistence level, the supply of labor decrease until wages rise to maintain the subsistence level. It is supposed that the supply of labor is infinetly elastic.

The just price is a theory of ethics in economics that attempts to set standards of fairness in transactions. With intellectual roots in ancient Greek philosophy, it was advanced by Thomas Aquinas based on an argument against usury, which in his time referred to the making of any rate of interest on loans.

Unjust price: a kind of fraud

The argument against usury was that the lender was receiving income for nothing, since nothing was actually traded. Aquinas later expanded his argument to oppose any unfair earnings made in trade, basing the argument on the Golden Rule. He held that it was immoral to gain financially without actually creating something. The Christian should "do unto others as you would have them do unto you", meaning he should trade value for value. Aquinas believed that it was specifically immoral to raise prices because a particular buyer had an urgent need for what was being sold and could be persuaded to pay a higher price because of local conditions: If someone would be greatly helped by something belonging to someone else, and the seller not similarly harmed by losing it, the seller must not sell for a higher price: because the usefulness that goes to the buyer comes not from the seller, but from the buyer's needy condition: no one ought to sell something that doesn't belong to him. Summa Theologiae, 2-2, q. 77, art. 1 Aquinas would therefore condemn practices such as raising the price of building supplies in the wake of a natural disaster. Increased demand caused by the destruction of existing buildings does not add to a seller's costs, so to take advantage of buyers' increased willingness to pay constituted a species of fraud in Aquinas's view.

The Wage-Fund Doctrine is an expression that comes from early economic theory that seeks to show that the amount of money a worker earns in wages, paid to them from a fixed amount of funds available to employers each year (capital), is determined by the relationship of wages and capital to any changes in population. In the words of J. R. McCulloch,[1]

wages depend at any particular moment on the magnitude of the Fund or Capital appropriated to the payment of wages compared with the number of laborers... Laborers are everywhere the divisor, capital the dividend.

The economists who first stated this relationship assumed that the amount of capital available in a given year to pay wages was an unchanging amount. So they thought that as the population changed so too would the wages of workers. If the population increased, but the amount of money available to pay as wages stayed the same, the results might be all workers would make less, or if one worker made more, another would have to make less to make up for it and workers would struggle to earn enough money to provide for basic living requirements. Later economists determined that the relationship of capital and wages was more complex than originally thought. This is because capital in a given year is not necessarily a fixed amount. The Wage-fund doctrine model would be seen as less important in economic theory than later ones.

Model

In essence, Wage-Fund Doctrine states that workers wages are determined by a ratio of capital to the population of available workers. In this model, there is a fixed amount of capital available to pay for the costs of production and the wages necessary to sustain workers in the time between the start of production and the sale of production output. Capital may change from year to year, but only as a result of reinvesting the prior years savings. The wage-fund, therefore, may be greater or less at another time, but at the time taken it is definite. (Walker) Population is the endogenous variable affecting wages. As the working population changes, the available wage moves in the opposite direction. Additionally, because capital is fixed, the whole of [wage fund] is distributed without loss; and the average amount received by each laborer is, therefore, precisely determined by the ratio existing between the wage-fund and the number of laborers. (Walker)

If one worker earns more, another worker must earn less to compensate.

Origins
The doctrine has its roots in the Physiocrats Tableau conomique (Spiegel, pg. 389) in which the landowners provide capital to farmers in the form of land leases. The amount of land and the rents from it are fixed, and the capital needed for farming supplies and food for laborers in any one year is directly derived from the profits of the previous years production. Population is also the variable factor, but for the Physiocrats, it was constrained by the amount of land available for growing food, not by the amount of capital available to pay wages. From the early 1800s until after the Napoleonic wars were over in 1815, Great Britain had almost full employment to the point that an increase in the number of laborers had the effect to throw some out of employment or to reduce the rate of wages for all. (Walker) Capital was still believed to come only from savings in prior years, and no additional amount of money could be added to the production process to support more workers. Additionally, the capital used in the equation above was the macroeconomic concept of a countrys total accumulated wealth, not the wealth of individuals. At the microeconomic level, though, enough capital had been generated in prior years that employers found no (financial) difficulty in paying their laborers by the month, the week, or the day, instead of requiring them to await the fruition of their labor in the harvested or marketed product. (Walker) Unlike the Physiocrats tableau, the money to maintain the subsistence of employees during production did not have to come from previous years savings. The wages were so low, however, that workers still lived at barely subsistence level.
The Residual Claimant Theory: W. S. Jevons In countering the wages-fund hypothesis of Mill, an alternate theory known as the residual claimant theory was proposed. Adam Smith and others before him intimated that rent and profits were deductions from the produce of labor. William Stanley Jevons first stated the theory positively in 1862, but the analysis of Francis Walker, twenty years later, is usually referred to. The essence of it is that portions of the product are first deducted for rent, interest, and profits. The remainder is the property of labor. The validity of the theory rests upon the independent determination of, and limitations upon, the shares of these three prior claimants. These being assumed, further economies in production or increased production would enlarge the share remaining for wages. The difficulty lies in establishing the independent determination of rent, interest, and profits. That apparently is yet to be done.

 Theory of Wages, Karl Marx Labor Power Is a Commodity Marx's theory of wages is merely an extension of his general theory of value to a specific category of prices. In the Marxian sense, a wage is a price paid for labor power, not for labor. "By labor power or capacity for labor is to be understood the aggregate of those mental and physical capabilities existing in a human being, which he exercises whenever he produces a use value of any description." "Labor power" is the thing that enters the labor market, being sold by the laborer and purchased by the capitalist employer. Thus, "labor power" is a commodity having exchange value, since the laborer can alienate it from his person as he sells to the capitalist the right to use his use value or labor. It is only this right that can be alienated, and consequently "labor is the substance, and the immanent measure of value, but has itself no value" (that is, no exchange value). In other words, Marx holds that the thing the worker sells to the employer is the right to put him as a worker to work. It is not the productivity of the worker that is sold; it is merely the right to make the worker exert himself. However, since the use value of the productivity of the worker cannot be severed from his power to release this use value or productivity, the employer buys the labor power but gets the use value of that labor power, or the labor itself. Thus, while it may appear that the use value of the worker, or the labor itself, is the subject of the wage contract and is paid for, the fact is that only the labor power is paid for, while the actual use of that labor power is a thing separate and distinct from it. In any event, it is the labor power that is paid for, and the value of this labor power is the wage. At this point this distinction is noted only as a part of the Marxian theory of wages. Its significance will be evident in the discussion of surplus value in the next chapter. To Marx a wage can exist only in a situation in which (1) the worker is free to sell his labor power and (2) he cannot by himself make use of it in producing some commodity for sale. Labor power can appear upon the market as a commodity only if, and so far as, its possessor, the individual whose labor power it is, offers it for sale, or sells it, as a commodity. In order that he may be able to do this, he must have it at his disposal, must be the untrammeled owner of his capacity for labor, i.e., of his person. . . . The second essential condition to the owner of money finding labor power in the market as a commodity is thisthat the laborer, instead of being in the position to

sell commodities in which his labor is incorporated, must be obliged to offer for sale as a commodity that very labor power, which exists only in his living self.

The Keynesian Theory

Keynes's theory of the determination of equilibrium real GDP, employment, and prices focuses on the relationship between aggregate income and expenditure. Keynes used his incomeexpenditure model to argue that the economy's equilibrium level of output or real GDP may not corresPond to the natural level of real GDP. In the income-expenditure model, the equilibrium level of real GDP is the level of real GDP that is consistent with the current level of aggregate expenditure. If the current level of aggregate expenditure is not sufficient to purchase all of the real GDP supplied, output will be cut back until the level of real GDP is equal to the level of aggregate expenditure. Hence, if the current level of aggregate expenditure is not sufficient to purchase the natural level of real GDP, then the equilibrium level of real GDP will lie somewhere below the natural level.
In this situation, the classical theorists believe that prices and wages will fall, reducing producer costs and increasing the supply of real GDP until it is again equal to the natural level of real GDP.

According to Keynesian theory, some individually-rational microeconomic-level actions if taken collectively by a large proportion of individuals and firms can lead to inefficient aggregate macroeconomic outcomes, wherein the economy operates below its potential output and growth rate. Such a situation had previously been referred to by classical economists as a general glut. There was disagreement among classical economists on whether a general glut was possible. Keynes contended that a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers. In such a situation, government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Most Keynesians advocate an activist stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. For example, when the unemployment rate is very high, a government can use a dose of expansionary monetary policy. Keynes argued that the solution to the Great Depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[3]

A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a strong general tendency towards equilibrium. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow for price adjustment to eventually achieve this goal. More broadly, Keynes saw his theory as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization. The new classical macroeconomics movement, which began in the late 1960s and early 1970s, criticized Keynesian theories, while New Keynesian economics has sought to base Keynes' ideas on more rigorous theoretical foundations. Some interpretations of Keynes have emphasized his stress on the international coordination of Keynesian policies, the need for international economic institutions, and the ways in which economic forces could lead to war or could promote peace.[4]

Neoclassical synthesis is a postwar academic movement in economics that attempts to absorb the macroeconomic thought of John Maynard Keynes into the thought of neoclassical economics. Mainstream economics is largely dominated by the resulting synthesis, being largely Keynesian in macroeconomics and neoclassical in microeconomics.[1] The theory was mainly developed by John Hicks, and popularized by the mathematical economist Paul Samuelson, who seems to have coined the term, and helped disseminate the "synthesis," partly through his technical writing and in his influential textbook, Economics.[2][3] The process began soon after the publication of Keynes' General Theory with the IS/LM model first presented by John Hicks in a 1937 article.[4] It continued with adaptations of the supply and demand model of markets to Keynesian theory. It represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded.
Investment theory encompasses the body of knowledge used to support the decision-making process of choosing investments for various purposes. It includes portfolio theory, the Capital Asset Pricing Model, Arbitrage Pricing Theory, and the Efficient market hypothesis.

Supply and demand

For other uses, see Supply and demand (disambiguation).

The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.

Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity. The four basic laws of supply and demand are:[1]
1. If demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity. 2. If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity. 3. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity. 4. If supply decreases and demand remains unchanged, then it leads to higher price and lower quantity.

marginal productivity theory of wages

Economic concept that demand for labor is determined by its marginal productivity, and the wage rates are determined by the value of the marginal product of labor. Also called marginal productivity theory of income distribution.

14.2 Marginal Productivity Theory (A) MPP and MRP: Just as demand and supply forces together determine prices and quantities of goods exchanged in the product market similar rules operate in the factor market. If the labor market is assumed to be competitive then the rate of wages will be fixed and uniform. At such a competitive wage rate a firm has to decide how many workers it can profitably employ. In other words, a firm has to determine its own demand for labor. The productive contribution of an additional or marginal worker governs such a demand for labor since labor is a productive service. A firm is guided in this respect by the marginal productivity rule. The most important principle determining demand for labor is called Marginal Productivity Theory. It attempts to relate marginal contribution to the output produced and the rate of wages required to be paid to the marginal worker. Wages are paid in cash or money units while the product is measured in physical units. To make the comparison convenient Marginal Physical Product (MPP) is converted into Marginal Revenue Product (MRP). For this purpose, MRP is multiplied by the marginal revenue earned by a firm in the curve. If a firm is operating under a competitive product market then the price or the average revenue and marginal revenue values are identical. MRP is Price MPP under competition. This same value is MR MPP under imperfect markets. MRP = MPP Price Competition MRP = MPP MR Monopoly, Oligopoly etc. (B) A Firms Demand Curve: Let us begin with the simple case of a competitive market. There is competition both in the labor market and the product market. Price of the product is assumed to be $5. The firm has to determine its demand under the following productivity conditions: Marginal Revenue Product (MPP $5) 25 35 30 20 15

No. of workers Employed 1 2 3 4 5

Total Physical Product 5 12 18 22 25

Marginal Physical Product 5 7 6 4 3

In the example, the number of workers employed increases progressively from 1 to 5. With more workers employed total output continuously increases from 5 to 12to 25 units. Marginal product initially rises from 5 to 7 (12-5=7) but subsequently falls from 7 to 6, 4, and then 3.

Under competitive product market MRP or money value of the MPP at a fixed price of $5 will be 25, 35, 30, 20 and 15. The firm will decide how many workers need to be employed depending on the present market rate of wages. If the rate of wages is as high as $35 per worker, the firm can employ only two workers. With the wage rate as low as $15 the firm can employ five workers. If we assume that the actual competitive labor market wage rate is $20 the firm can employ 4 workers and remain in equilibrium. At this wage rate the demand and supply forces have been equated.

In Figure 52, we have MRP, the demand curve for labor. This is the downward sloping curve showing a progressive fall in the productivity of labor. It enables the firm to employ more workers only at a lower wage rate. The labor market is competitive and $20 is the fixed uniform rate of wages. At this wage rate any number of workers will offer services. Therefore the labor supply curve is perfectly flexible. It is represented by the horizontal straight line WS (AW = MW) curve. The rate of wages as a price of labor is equal to both the average wage and the marginal wage per worker. The demand and supply curves intersect at the point of equilibrium e. At this point a firm employs N = 4 workers and pays W = $20 as wages. This is a profitable situation for the firm.

MARGINAL PRODUCTIVITY THEORY: A theory used to analyze the profit-maximizing quantity of inputs (that is, the services of factor of productions) purchased by a firm in the production of output. Marginal-productivity theory

indicates that the demand for a factor of production is based on the marginal product of the factor. In particular, a firm is generally willing to pay a higher price for an input that is more productive and contributes more to output. The demand for an input is thus best termed a derived demand. Marginal productivity theory is a cornerstone in the analysis of factor markets and the input side of short-run production. It provides insight into the demand for factors of production based on the notion that a profit-maximizing firm hires inputs based on a comparison between the productivity of the input and the cost of the input.

Definition of 'Production Efficiency'

1. An economic level at which the economy can no longer produce additional amounts of a good without lowering the production level of another product. This will happen when an economy is operating along its production possibility frontier. 2. The ability to produce a good using the fewest resources possible. Efficient production is achieved when a product is created at its lowest average total cost.

Investopedia explains 'Production Efficiency'

1. Production efficiency measures whether the economy is producing as much as possible without wasting precious resources. Theoretically, production efficiency will include all of the points along the production possibility frontier, but this is difficult to measure in practice. 2. Because resources are limited, being able to make products efficiently allows for higher levels of production. If the economy can't make more of a good without sacrificing the production of another, then a maximum level of production has been reached.

X-inefficiency
X-inefficiency is the difference between efficient behavior of firms assumed or implied by economic theory and their observed behavior in practice. It occurs when technical-efficiency is not being achieved due to a lack of competitive pressure. The concepts of x-inefficiency was introduced by Harvey Leibenstein.[1]

Economic theory assumes that the management of firms act to maximize economic profits -which is accomplished by adjusting the inputs used or the output produced. In perfect competition, the free entry and exit of firms tends toward firms producing at the point where price equals long run average costs and long run average costs are minimized. Thus firms earn zero economic profits and consumers pay a price equal to the marginal cost of producing the good. This result defines economic efficiency or, more precisely, allocative economic efficiency. Empirical research suggests, however, that a number of firms do not produce at the point where long run average costs are minimized[citation needed]. Some of this can be explained away by the mechanics of imperfect competition; what cannot be explained by traditional economics is described as X-inefficiency. With market forms other than perfect competition, such as monopoly, it may be possible for xinefficiency to persist, because the lack of competition makes it possible to use inefficient production techniques and still stay in business. In addition to monopoly, sociologists have identified a number of ways in which markets may be organizationally embedded, and thus may depart in behavior from economic theory. X-inefficiency is not the only type of inefficiency in economics. X-inefficiency only looks at the outputs that are produced with given inputs. It doesn't take account of whether the inputs are the best ones to be using, or whether the outputs are the best ones to be producing, which is referred to as allocative efficiency. For example, a firm that employs brain surgeons to dig ditches might still be x-efficient, even though reallocating the brain surgeons to curing the sick would be more efficient for society overall.

Examples
Monopoly A monopoly is a price maker in that its choice of output level affects the price paid by consumers. Consequently, a monopoly tends to price at a point where price is greater than longrun average costs. X-inefficiency, however tends to increase average costs causing further divergence from the economically efficient outcome. The sources of the X-inefficiency have been ascribed things such as overinvestment and empire building by managers, lack of motivation stemming from a lack of competition, and pressure by labor unions to pay abovemarket wages.

X-inefficiency can also occur when monopolies or even oligopolies produce higher than the minimum average cost

Sub-optimization
Principia Cybernetica gives a brief description of the principle of sub-optimization. In their

terms, optimizing all sub-systems will not necessarily mean the system as a whole operates optimally. The principle should be expressed more strongly as for a system to operate optimally, at least one system must be sub-optimal For a system to be viable, it must be capable of handling surges in demand or crises. That is, it should be decoupled from these drivers through slack resources. These potentially idle resources are held somewhere in the enterprise, perhaps as stocks on the ground or mechanics waiting to be called to duty. To some observers, these idle resources are inefficient; the holding sub-system is sub-optimal. However, if these resources are not available when they are need the very existence of the containing system is at risk. The implication of this principle is that at least one sub-system must be allowed to operate with slack resources. Efficiency experts and 'razor gangs' should be kept away. Of course, the location and extent of the slack resources should be planned. This principle should be considered together with subsidiarity.

Transaction Cost Theory

The transaction cost theory, developed by Williamson, Buckley & Casson and Hennart focuses on the problem of organising interdependencies between individuals. Transaction cost economics arises when MNCs are more efficient than markets and contracts in organising interdependencies between agents located in different countries. If a company intends to exploit a firm-specific asset in a foreign market and this exploitation has to be done in that market due to localisation factors (e.g trade barriers, high transportation costs or other country-specific factors), the company often tends to do this by investing abroad in their own facilities rather than through, for example a license. The more intangible the firmspecific asset is, the stronger this tendency will be. The reason is that intangible assets are difficult to do business with. The internalisation model and cost efficiency thinking have dominated the theoretical debate among economists during the last two decades. However, the internalisation approach has lately been questioned with reference to models dealing with how knowledge is used as a value-creating asset in the company. One critical argument is that multinational companies exist, because knowledge across borders can be transferred more efficiently inside the company than between independent companies, not because of market failure. This means that in general intangible asset can be treated as a sellable asset, but can seldom be detached from the firm itself and cannot be treated as a public good.

The cost of organising a transaction varies with the two basic methods of organisation, the price system and hierarchy. The price system is dependent on agents' definitions and measurements to make an accurate estimation of the value of goods and services. Behavioural assumptions like bounded rationality and self-interest seeking are reasons that make some market participants take advantage of measurement difficulties to overprice and/or underperform. This kind of behaviour makes some agents develop a 'cheating' behaviour. Self-seeking attributes are variously described as opportunism, moral hazard and agency. In order to avoid this 'cheating' behaviour companies internalise and integrate the transactions. The benefits of integration and control must, however, be compared with the costs of control. The transaction cost theory states that companies integrate when asset specifity is high, to retain control over the specific advantages they offer to the market.

Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange (restated: the cost of participating in a market). For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal. Or consider buying a spatula from a store; to purchase the spatula, your costs will be not only the price of the spatula itself, but also the energy and effort it requires to find out which of the various spatula products you prefer, where to get them and at what price, the cost of traveling from your house to the store and back, the time waiting in line, and the effort of the paying itself; the costs above and beyond the cost of the spatula are the transaction costs. When rationally evaluating a potential transaction, it is important to consider transaction costs that might prove significant. A number of kinds of transaction cost have come to be known by particular names:[1]

Search and information costs are costs such as those incurred in determining that the required good is available on the market, which has the lowest price, etc. Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. In game theory this is analyzed for instance in the game of chicken. On asset markets and in market microstructure, the transaction cost is some function of the distance between the bid and ask. Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.

Examples

A supplier may bid in a competitive environment with a customer to build a widget. However, to make the widget, the supplier will be required to build specialized machinery which cannot be easily redeployed to make other products. Once the contract is awarded to the supplier, the relationship between customer and supplier changes from a competitive environment to a monopoly/monopsony relationship, known as a bilateral monopoly. This means that the customer has greater leverage over the supplier such as when price cuts occur. To avoid these potential costs, "hostages" may be swapped to avoid this event. These hostages could include partial ownership in the widget factory; revenue sharing might be another way. Car companies and their suppliers often fit into this category, with the car companies forcing price cuts on their suppliers. Defense suppliers and the military appear to have the opposite problem, with cost overruns occurring quite often. Technologies like enterprise resource planning (ERP) can provide technical support for these strategies.

agency theory

Definition
A theory explaining the relationship between principals, such as a shareholders, and agents, such as a company's executives. In this relationship the principal delegates or hires an agent to perform work. The theory attempts to deal with two specific problems: first, that the goals of the principal and agent are not in conflict (agency problem), and second, that the principal and agent reconcile different tolerances for risk.

Agency Theory in Management

| Nicolai Foss | I believe that agency theory is one of the most informative, useful, and interesting theories coming out of economics ever. It is surely also one of the most influential econ theories in management. Agency theory is, however, fundamentally complicated, and difficult to teach. I find it impossible to teach without making use of at least some math (specifically, simple versions of the linear model). In particular, grasping the role that the risk premium plays in the theory, and, in this connection, what is really the source of the agency loss, is often very difficult for students. However, not only students but also management academics have difficulties understanding the theory.

Here are some examples of common mistakes in the management literature: 1. Conflating moral hazard and opportunism (e.g., Anurag Sharmas 1997 paper in AMR). This is one of the smaller sins and many economists have sinned here as well, thinking of moral hazard as ex ante opportunism. However, opportunism is tied to recontracting which moral hazard isnt. 2. Bounded rationality and asymmetric information. Agency theory emphatically does not make the assumption of bounded rationality. Contracting is not imperfect in this theory because of bounded rationality but because of asymmetric information. Eisenhardts heavily cited (1,325 hits on google scholar) 1989 paper makes this mistake. 3. The perspective of the theory. Much critique of agency theory, e.g., by Charles Perrow, takes its starting point in the claim that it takes the perspective of the principal. It does not. It is a theory about joint value maximization and what self-interested parties can do to remedy obstacles to such maximization. It takes an agent perspective as much as it takes a principal perspective. What critics may have in mind is the assumption, mainly motivated by analytical convenience, that the principal has all the bargaining power. 4. Types of agency theory. Some management writers, such as Nilakant and Rao (1994, Org Studies), claim a distinction between positivist agency theory (largely verbal, mainly concerned with corporate governance) and formal agency theory (think Bengt Holmstrm). The distinction is bogus. While there may be more or less formal contributions to agency theory the analytical core is the same.