Principle Agent Relationship Discussion

Description

Research on an area of Principal Agent Relationship and apply Economic Principals to a fact pattern.

2 attachmentsSlide 1 of 2attachment_1attachment_1attachment_2attachment_2.slider-slide > img { width: 100%; display: block; }
.slider-slide > img:focus { margin: auto; }

Unformatted Attachment Preview

This Photo by Unknown Author is licensed under CC BY-SA-NC
COMPETITIVE MARKETS
CHAPTER 12
COMPETITIVE MARKETS
DEFINED
•
A competitive market is a market in which there are many companies producing
the same commodity and many consumers purchasing it. In such a market, each
producer believes that he has no control over the prevailing price of the
commodity because he supplies such a small fraction of it. Similarly, each
consumer believes that she has no control over the price because she buys such
a small fraction of the total amount sold.
•
Assumption – that companies presently in the industry are free to leave the
industry if profit opportunities are better elsewhere, and that new companies are
free to enter this industry if it is more profitable than alternative investment
opportunities.
•
This assumption of free exit and free entry of companies defines what
economists refer to as the long run (as opposed to the short run where
companies can leave but not enter.) When all companies that want to leave the
industry have done so and when all companies that want to enter have done so,
the industry is said to be in long-run equilibrium.
PRINCIPLE OF COMPETITIVE MARKETS:
PRICE = COSTS (OF PRODUCTION)
•
Lawnmower example – Suppose that it costs $100 to manufacture a lawn mower. If the price of lawn
mowers were below $100, say $75, then a producer would lose $25 for every lawn mower made. It
would be more profitable for the firm to go out of business — that is, to exit — and to earn nothing
than to lose money producing lawn mowers.
•
In long run equilibrium — after all companies that want to exit have done so — the price of lawn
mowers would have to be at least $100. But if the price of lawn mowers was above $100, say $150,
then lawn mower production would be very profitable.
•
RESULT: new companies would enter this industry because of its profitability. Consequently, the
supply of lawn mowers would increase, a glut would occur, and the price would begin to fall. And as
long as the price exceeds the cost of production, companies would continue to enter this industry and
the price would continue to fall.
•
SO … in equilibrium, the price of lawn mowers would not exceed $100.
•
Bottom line is that, because companies are free to exit and to enter the industry, the price of a
product will equal its cost of production.
THE EFFICIENCY OF COMPETITIVE PRICING
• Price equals costs is good because of the principle that states that if companies take “all relevant
costs” into account in setting their price, a competitive market will lead to the efficient outcome. (just
company’s costs of production for now)
• Cost of production equals the owner’s ROI and the EE compensation
• Back to the lawnmower – people have different values for them — for example, someone with a large
yard would be willing to pay more for a lawn mower than someone with a small yard.
• We assumed that lawn mowers cost $100 to produce. But if we say that lawn mowers sell for $150,
someone who values a lawn mower at $125 will not buy one. But this is inefficient because the
benefit of the lawn mower, $125, exceeds its production cost, $100. There would be an efficiency
gain of $25 if this person were to obtain a lawn mower. If we go the other way, suppose that lawn
mowers are priced at $75. Then someone who values a lawn mower at $85 will purchase one. But
this is inefficient too, because the benefit of the lawn mower is less than its production cost of $100.
There will be an efficiency loss of $15 when this person buys a lawn mower.
CONCLUSION
ABOUT
COMPETITIVE
PRICING
In general, if a good is priced above its cost of
production, then some individuals who value
the good more than its cost will not buy it,
which is an inefficient outcome; and if a good
is priced below its production cost, then some
individuals who value it less than its cost will
buy it nonetheless, which also is an inefficient
outcome.
Only if the price of the good equals its cost of
production will those people who value it
more than its cost buy it and those who value
it less not buy it. This is required to achieve
the efficient outcome. Because, according to
the first principle, the price of a good in a
competitive market equals its cost of
production, a competitive market will lead to
the efficient outcome.
EIGHTH
APPLICATIONPOLLUTION
CONTROL
CHAPTER 13
This Photo by Unknown Author is licensed under CC BY-ND
POLLUTION
CONTROL
• The discussion will be based on an example in which
companies emitting air pollution harm households
downwind of the pollution.
• For simplicity, it is assumed that the victims of the
pollution are not also consumers of the product
manufactured by the companies.
• In the example, the harm to the victims depends on
whether the companies filter their smoke before
discharging it into the atmosphere.
• The filtering process reduces the level of pollution but
does not eliminate it. Filtering also increases the
polluters’ cost of production. The victims of the pollution
initially are assumed to be unable to affect the damage
they suffer.
Pollution Control Example
Behavior of Firm
Don’t filter
Filter
Firm’s Production Victims’ Pollution
Cost Per Unit
Damage Per Unit
(1)
$100
$115
(2)
$40
$10
Full Cost Per Unit
(3)
$140
$125
Firm’s Cost Per
Unit under
Negligence
(4)
$140
$115
Firm’s Cost Per
Unit under Strict
Liability
(5)
$140
$125
CONTROLLING POLLUTION
• If the firm does not filter the pollution, its production cost per unit of output is $100 and the victims’ damage per
unit of output is $40.
• If the firm does filter the pollution, its cost per unit is $115 and the victims’ damage per unit is $10. Note that,
once the filtering decision has been made, there is no uncertainty with respect to the harm; thus, the issue of risk
allocation does not arise in this example.
• Given the data in Table 13, it is clear that the efficient solution involves filtering the pollution before discharging
it.
• Although filtering increases production cost by $15 for each unit of the firm’s output, it reduces pollution
damage by $30 for each unit produced.
• Another way to see that filtering is efficient is to note that the full cost of the product — the firm’s production
cost plus the victims’ pollution damage — is $140 if filtering does not occur but only $125 if it does occur. These
full cost numbers are shown in the third column of Table 13.
• Even if filtering occurs for each unit of the good that is
produced, an inefficient amount of the good may be
produced.
SECOND ASPECT TO
CONTROLLING
POLLUTION IN THE
EXAMPLE
• Equivalently, because the quantity consumed is the same
as the quantity produced, an inefficient amount of the good
may be consumed. For reasons seen in the previous
chapter, an inefficient amount will be consumed either if
some individuals who buy the good value it less than its
full cost or if some individuals who do not buy the good
value it more than its full cost.
• Because the full cost of the good is $125 — assuming that
filtering occurs — only individuals who value the good at
$125 or more per unit should consume it.
ONLY POLLUTERS DETERMINE HARM
• Do the liability rules of negligence and strict liability lead to the efficient control of
pollution?
• Negligence- if the standard of care requires companies to filter, companies are
liable only if they do not filter.
• Then, if a firm does not filter, its cost per unit totals $140 — the production cost of
$100 plus a liability cost of $40 (equal to the victims’ pollution damage per unit).
• If the firm does filter, its cost is $115 — just the production cost because it is not
liable.
LONG RUN EQUILIBRIUM
• Therefore – in long-run equilibrium, the price will be $115 per unit. If the price were
higher, entry into the market would occur due to the opportunities, and if the price were
lower, companies would leave the industry because they would be losing money.
• But if the equilibrium price is $115, excessive consumption of the good will occur. Given
that companies filter, the full cost of the good is $125, including the $10 residual
pollution damage borne by victims. Thus, at a price of $115, there will be persons who
value the good at less than its full cost — for example, at $120 — but who will buy it
nonetheless.
WHAT DOES THIS
SHOW ABOUT THE
NEGLIGENCE RULE
IN A COMPETITIVE
MARKET
Even though the rule of negligence, which makes a
reasonable standard of care by polluters necessary
and therefore efficient, it generally leads to an
inefficient level of output because the market price
does not reflect the full cost of the product.
Which means – the price does not include the
residual damages that occur even when each firm is
taking an efficient amount of care. Consequently,
too much of the harm-generating good will be
consumed.
STRICT LIABILITY APPLIED TO THE EXAMPLE
• companies will be made liable for the victims’ pollution damages regardless
of whether they filter or not. STRICT LIABILITY NO MATTER WHAT
• So each firm’s cost, including its liability payments, would be $140 per unit if
it does not filter and $125 if it does. Each firm therefore will choose to filter.
• Thus, in long-run equilibrium, the price of the good will be $125 and, because
the full cost also is $125, the amount of the good bought by consumers will
be efficient. (competitive)
• This example illustrates a general observation about strict liability in
competitive markets: Strict liability can induce companies to take the
efficient amount of care and can induce consumers to purchase the efficient
amount of the product. This is because the market price reflects the full cost
of the product, including the damages that remain even when each firm is
taking the proper level of care.
This Photo by Unknown Author is licensed under CC BY-SA
VICTIMS ALSO AFFECT HARM –
NEGLIGENCE AND STRICT LIABILITY
• How can they lessen (or mitigate their damages)
• Paint their homes with pollution resistant paint or move to a less
polluted neighborhood
• Similar to the car accident and the pedestrian case – both parties
can affect the outcome
• Then, the efficient solution now requires that the companies filter
their pollution, AND that the victims paint their homes with special
paint. This paint reduces the victims’ damages, but it does not
eliminate the damages. The efficient solution also still requires
that only those consumers who value the good more than its full
cost purchase it. Note, however, that the appropriate full cost now
equals a polluter’s cost of production plus the residual damages
that occur when the polluter is filtering and when the victims are
using the special paint.
This Photo by Unknown Author is licensed under CC BY-NC-ND
WHAT IF WE GO BACK TO NEGLIGENCE NOW!
• Under the rule of negligence, the polluter would choose to filter in order to avoid the liability costs that he would incur.
• Then following that decision, the victims will bear their own losses and therefore will have an appropriate incentive to use
the pollution-resistant paint.
• Here it is similar to the automobile accident example – the negligence rule can induce both the injurer and the victim to take
appropriate care.
• But, the negligence rule still will fail to induce efficient decisions by consumers because the price of the good will not reflect
the damages that occur even when the polluters and the victims are taking appropriate care.
AND THEN STRICT LIABILITY
•
When we use the strict liability in tort, polluters also will choose to filter.
•
However, pollution victims will not have any incentive to use pollution-resistant paint because they will be fully compensated for their
damages (even if they do nothing!!)
•
So for the reasons discussed in Chapter 6 in the context of the automobile accident example, it is necessary to add a defense of
contributory negligence to induce the pollution victims to take the appropriate standard of care.
•
With this defense, the rule of strict liability will be efficient with respect to both parties’ care.
•
Because the victims will choose not to be contributorily negligent, the polluters will be liable for the victims’ residual damages. Thus,
the price of the product will reflect these damages and an efficient amount will be purchased.
CONCLUSIONS REGARDING POLLUTION USING BOTH THE
NEGLIGENCE AND STRICT LIABILITY STANDARDS
• If the victims can reduce their damages by taking the precautions mentioned with regard to
the pollution, then the basic conclusions about strict liability and negligence in the pollution
control example are not.
• The problem under the negligence rule is that the price of the good produced by the polluters
does not reflect the damages that still occur after all of the parties have taken appropriate
care.
• This inefficiency is corrected under the strict liability rule because the polluter is made liable
for these residual damages.
• It is necessary, however, to add a defense of contributory negligence to the strict liability tule
to create incentives for the victims to take appropriate precautions.
NINTH APPLICATIONPRODUCTS LIABILITY
CHAPTER 14
• Consumers have perfect information
ASSUMPTIONS BY
THE AUTHOR
• Consumers underestimate product risks
• Consumers can take care
• Consumers are Risk Adverse
ARE PRODUCT LIABILITY RULES EFFICIENT?
• Using info on competitive markets and on risk bearing and insurance to evaluate the
efficiency of the different liability rules (Comparative negligence and strict liability) for
dealing with product accidents.
• Example in text where a soda manufacturer must decide whether to use bottles or cans.
• Based on the fact that bottles are cheaper to produce but have higher expected accident
losses.
• It will be assumed initially that the victim of the accident is the purchaser of the soda and
that, for simplicity, she cannot affect expected accident losses by taking care. Normally it can
be anyone that
EXAMPLE P. 113
Behavior
of Firm
Firm’s Cost of
Production
per Unit
(1)
Probabliity
of Accident
to Consumer
(2)
Loss if
Accident
Expected
Accident
Loss
(3)
(4)
Full
Cost
Per
Unit
(5)
Use bottle
$1.00
1/100,000
$10,000
10 cents
$1.10
Use can
$1.03
1/200,000
$4,000
2 cents
$1.05
WE ARE CONSIDERING THE RULES OF STRICT LIABILITY,
NEGLIGENCE, AND NO LIABILITY.
• We are also assuming that costumers have perfect information about expected accident
losses.
• Under strict liability, firms are liable to consumers for their losses whenever an accident
occurs.
• So given the data in Table 14, each firm’s cost per unit — including expected liability
payments — would be $1.10 if bottles are used and $1.05 if cans are used. Thus, in long-run
equilibrium, the price per bottle would be $1.10 and the price per can would be $1.05.
• Consumers clearly will prefer to purchase soda in cans, in which case firms will find it
worthwhile to produce soda solely in cans
NEGLIGENCE
• Strict liability therefore is efficient both with respect to the care exercised by
each firm — in the example, whether cans or bottles are used — and with
respect to the output of the industry.
• Now we switch to negligence. Now we will suppose that the standard of care
corresponds to producing soda in cans, so firms will be liable only if they
produce soda in bottles.
• When we go to our example, a firm’s cost would be $1.10 if bottles are used
($1.00 in production cost plus 10 cents in expected liability cost) and $1.03 if
cans are used (just the production cost).
• Soda therefore will sell for $1.10 in bottles and for $1.03 in cans.
• Because consumers are assumed to have correct information about expected
accident losses, they will in effect add 2 cents to the price of cans because
they bear their own losses when cans are used.
•
Consumers still will prefer cans to bottles. Although soda in cans will sell for
$1.03, consumers will buy the correct amount because the effective price,
including the additional 2 cents in expected accident costs, is $1.05.
• Therefore, negligence also is efficient both with respect to care and output.
NO LIABILITY
• Under no liability, consumers bear their own losses regardless of
firms’ behavior.
• A firm’s cost, and the price, would be $1.00 if bottles are used and
$1.03 if cans are used. Because consumers will in effect add 10
cents to the price of bottles but only 2 cents to the price of cans,
consumers only will want to buy soda in cans.
• And because they will treat the effective price of soda in cans as
$1.05, they will purchase the correct amount.
• Therefore, no liability also is efficient with respect to care and
output.
• This discussion illustrates a general result in the economic analysis
of product liability rules: When producers and consumers are risk
neutral and consumers have perfect information about product
risks, the choice of a liability rule is not relevant. Every rule will be
efficient in terms of the care exercised by producers and the output
of the industry.
• The assumption that consumers have perfect information
about expected accident losses is wrong.
CONSUMERS
UNDERESTIMATE
(OR DON’T
ESTIMATE)
PRODUCT RISKS
• Especially when it is about products that cause harm very
infrequently.
• Consumers also may not read directions and operate/use
a product incorrectly.
• They think the product is perfectly safe for the most part.
• SOME EXAMPLES!
• Cars, children products, health care supplements, hair and
skin products, ATVs, etc.
CONSUMERS CAN ALSO TAKE CARE …
• and co-exist with the above presumption that they do
not know about the safety of a product
• DO NOT SHAKE THE CAN!!!
• if consumers can take care and underestimate product
risks, strict liability with a defense of contributory
negligence will be superior to the negligence and no
liability rules provided that consumers comply with the
standard of care applicable to them in order to avoid
being found contributorily negligent.
• The strict liability rule will be efficient with respect to
the care and purchase decisions of consumers and the
care decisions of firms.
This Photo by Unknown Author is licensed under CC BY-NC
PRODUCT LIABILITY HYPOS
McDonald’s, a leading fast-food chain of restaurants in the United States, was
sued by Arnold Pellman and other teenagers, all New York residents who
frequently ate at McDonald’s outlets, contending that they suffered adverse
health effects, including becoming overweight as the result of eating
McDonald’s food containing high levels of cholesterol, fat, salt, and sugar. They
further contended that McDonald’s failed to warn the public of the high
quantities of unhealthy ingredients in their products. McDonald’s produced
evidence that they made their nutritional information available online and that
such information was also available upon request. The plaintiffs (Pellman and
others) failed to show a direct relationship between their eating McDonald’s
fast food and the adverse effects on their health. Should Pellman and the other
teenagers be successful in their lawsuit against McDonalds?
This Photo by Unknown Author is licensed under CC BY-ND
• Why or Why not?
This Photo by Unknown Author is licensed under CC BY-SA
LEMON LAW FOR PUPPIES
Balch purchased a dog for $800 from Newberry, who
operated a kennel. Before the sale, Balch informed
Newberry that he wanted a male dog for breeding
purposes. Newberry stated that the dog had the ability
to produce pups of pedigree quality. Balch relied on
this fact when he purchased the dog. After the
purchase, Balch discovered that the dog was sterile and
therefore of no value to Balch for breeding pups. Could
Balch demand the return of his $800 after returning
the dog? (Balch v. Newberry, Okla. 253 P.2d 153)
PIZZA PIZZA PALOOZA
Walker owned several pizza parlors that operated under the name of El Fredo
Pizza, Inc. He planned to open a new parlor and to purchase a new oven.
When a friend suggested that Walker purchase an oven from the Roto-Flex
Oven Co., Walker contacted an agent from that company and negotiated the
purchase of a new oven. Walker made clear the particular purpose for which
he was buying the oven—to cook pizza—and that he was relying on the
agent’s skill and judgment in selecting a suitable oven. Based on the agent’s
suggestion, Walker contracted to purchase a custom-built, Roto-Flex “Pizza
Oven Special.” Once the oven was installed, Walker had nothing but
trouble—uneven heating—which caused the pizza to be improperly cooked
when it came out of the oven. Roto-Flex attempted to fix the oven but could
not. El Fredo brought action against Roto-Flex for breach of the implied
warranty of fitness for a particular purpose. Should El Fredo be successful? (El
Fredo Pizza, Inc. v. Roto-Flex Oven Co., 291 N.W.2d 358)
TENTH APPLICATION –
PRINCIPAL-AGENT LIABILITY
CHAPTER 15
PRINCIPAL-AGENT LIABILITY IS A LITTLE COMPLICATED!
• This is not a single actor situation, the actor (agent) is controlled by someone else, the principal.
• So we will take a look at some of the principles of liability from earlier chapters when the harm is
caused by the agent of a principal.
• The main issues to be addressed are: is the optimal level of liability different when harm is caused by
an agent of a principal rather than by a single actor? Should liability be imposed on the principal, the
agent, or both? If on both, what is the optimal (best) mix of liability between the principal and the
agent?
• All of this is in consideration of legal rules and principles.
ASSUMPTIONS BY AUTHOR
• We use the company as the principal and the company
employees as the agent (from previous chapters)
• Agent as Risk Adverse
• Agents can be monitored
• Judgment Proof Situations (Defendant!)
• Who is responsible- Principal or Agent
This Photo by Unknown Author is licensed under CC BY-SA-NC
ETHICS REACTION PAPER MAKES A
COMEBACK
• Ethics example from Module 4.
• Was the agent liable for completing this illegal/unethical
task?
• Who is going to pay for the damages in that situation?
• Why do we consider this to be the case, why not let the agent
pay for their wrongdoing?
• What is scope of employment and how can that be entered
into the equation.
This Photo by Unknown Author is licensed under CC BY
IF AGENT IS RISK ADVERSE
• Similar to breach of contract remedies and automobile accidents, the risk aversion of a party
tends to lower the optimal level of liability that it should bear.
• The same conclusion applies here. If risk-averse agents are made liable whenever an
uncertain harm occurs, the amount they should pay normally is less than the harm, due to
the fact that the agents’ bearing of risk is a cost that can be reduced by lowering the level of
their liability payment.
• We previously concluded that the optimal level of liability is equal to the harm and that it
does not matter whether this level of liability is imposed on the principal, the agent, or a
combination of the two.
• This conclusion still holds even if the agent is risk averse, for the following reason.
ISSUE REGARDING IMPOSING UNCERTAIN HARM ON THE
AGENT- AGENT MUST BE CAREFUL!
• If liability for an uncertain harm is imposed on the agent, the principal will have an incentive
to indemnify the agent to reduce the agent’s bearing of risk. Otherwise, the agent would
demand higher compensation, not only for the expected liability cost, but also for the bearing
of risk per se.
• Conversely, if liability for harm is imposed on the principal, the principal will be reluctant to
levy an internal sanction on the agent because such a sanction would result in the agent’s
demanding higher compensation.
• In short, whether liability is imposed on the agent or on the principal, the principal will want
the agent to be insulated from risk in order to lower the principal’s wage cost.
• If the level of liability equals the harm caused, the principal will continue to be properly
motivated to induce the agent to take cost-effective precautions, for the reasons discussed.
CONCLUSION
• So even if the principal cannot successfully influence the behavior of his agents,
imposing liability on the principal is beneficial because doing so will cause the principal
to reduce his participation in harm-creating activities and thereby decrease his liability.
• And even if it is not entirely feasible to make agents directly liable for harm because their
harm-creating conduct is difficult to observe or prevent, it still is desirable to make the
principal liable for harm, both to give the principal proper incentives to control his agents
in any way that he can and to reduce the principal’s participation in risky activities.
• This is a win-win
JUDGEMENT PROOF ISSUES
• Not having enough assets to pay for the harm that is caused by the company (principal
and agent)
• If an agent is judgment proof and is not going to be considered at all liable for his/her
actions, they will not take enough precaution to prevent harm. This may change
depending on whether or not the action is legal.
• Even though an agent may be judgment proof, the principal will be responsible for paying for the harm caused.
• Especially when the agent is an employee and the principal is a company (that can afford that!)
• In this situation, agent liability and principal liability are no longer equivalent and if liability is imposed only on
the agent, the agent will not take sufficient precautions to prevent harm because the agent will only be
responsible for a fraction of the harm.
• It is almost always the right choice to impose liability on the principal.
• So there are two advantages to making the principal liable rather than the agent
• First, having to pay for the full harm will give the principal an appropriate incentive to find ways to better control the
agent.
• Second, even if the principal cannot prevent the agent from taking insufficient care, having to pay for the full harm will
cause the principal to appropriately reduce his participation in harm-creating activities.
MONITORING OF AGENTS (AMONG
OTHER THINGS)
• Can sometimes be difficult for the principle to determine
whether or not an agent was the one that did something to
cause the harm
• But liability can still can be imposed on the principal.
• So if the principal is made strictly liable for the harm, he will have
the appropriate incentive to monitor and control his agents,
• EXAMPLES: requiring them to keep detailed records of their
activities or by hiring other individuals to observe their
performance. Or other internal sanctions – like reducing their
compensation when harm occurs.
This Photo by Unknown Author is licensed under CC BY-SA
EMPLOYEE/EMPLOYEE HYPO PALOOZA
WORKERS COMP
• Nathan, a 22-year-old nurse, worked in the surgical ward of Presbyterian Hospital in New
York City. She was exposed for a period of about twelve days to a patient who had
tuberculosis. As a result, she contracted tuberculosis in her right lung and had to leave
work until she was cured. Was Nathan covered for payment under workers’
compensation? How would her salary be calculated?
(Nathan v. Presbyterian Hospital in the City of New York, 411 N.Y.S.2d 419)
AGE DISCRIMINATION
• Rhodes sold equipment for Gulberson Oil Tools. He was fired at age 56, when his
employer claimed that it was downsizing to cut costs. Six weeks later, Gulberson hired a
person age 46 to do the same job. Rhodes sued, claiming age discrimination. At trial,
Rhodes offered proof of his abilities and experience. Gulberson claimed that Rhodes
performed poorly but offered no proof. Should Rhodes’s lawsuit succeed?
(Rhodes v. Gulberson Oil Tools, 75 E.2d 989)
• How would you calculate damages?
VICARIOUS LIABILITY
White, a truck driver employed by Inter-City, was driving a tractor-trailer along a highway
when he got into a disagreement with Kuehn while attempting to pass his car. When both
drivers pulled off the road to talk, White hit Kuehn on the head with a metal pipe, injuring
him. White was convicted of assault. Kuehn sued both White and Inter-City for damages for
his injuries. Is Inter-City responsible for White’s actions? (Kuehn v. White & Inter-City Auto
Freight, Inc., Wash. 600 P.2d 679)
• What if the agent is judgment proof
CHAPTERS 23, 24 & 25
Agency
Employment and
Compensation
Agency
• Agents and principles
• All businesses use the agency relationship
• Sole proprietors
• Partners are agents to one another and
partnership
• Corp. acts thru officers,
directors, shareholders
Definition
and
Elements of
Agency
• Voluntary consensual relationship between
two persons whereby one person, the
principal, has a right to control the conduct
of another, the agent, and the agent has the
power to legally bind the principal
• Doesn’t have to be in writing
• Can be by power of attorney (until death)
Diagram
Principal
General/Special Agent
Servant
Sub Agent
Independent Contractor
Sub Servant
Subagent Contractors
Types of Principals
• Disclosed
• Partially disclosed
• Undisclosed
Types of Agents
• General agents
• Special agent
• Servant
• subservant
• Independent contractor
• Subagent/subcontractor
***diff between servant and
independent contractor
important***
Independent
Contractor
vs. Servant
(Employee)
New legislation-standards 8 point test
(from 20 pt test-IRS)
• Comparable services to public
• Can perform for more than one
recipient at a time
• No control of the manner and means
of service
• Indep. ker controls the means of
service
Servant = employee
independent contractor is different
Independent
contractor
(cont.)
• Contract for work performed
• Profit or loss under contracts to
perform
• Indep. ker. responsible for
satisfactory completion of work
• Indep. ker incurs expense
Duties and
Obligations
between P &
A
Fiduciary obligation between the parties
Agent-must do work that principal has
directed within scope of employment
• Should use reasonable care and diligence to
accomplish the principal’s objectives
• Must be loyal and act solely for interests of
the principal (can’t compete)
• Must also account to the principal
• Must be competent and act with reasonable
skill
• Communication-duty to communicate
matters coming to the attention of the
agent
Duties and Obligations
between P & A (cont.)
• Principal-must compensate agent according
to the reasonable value
of the agent’s services
• Must supply means to serve (office,
supplies, phones)
• Indemnification of agent for any expenses
incurred by agent while acting on
behalf of the principal
• Can’t embarrass the agent or his reputation
• Reimburse for out of pocket expenses
• No sexual discrimination/harassment:
quid pro quo/
hostile environment
Agency Authority
• Actual authority-usually and
reasonably needed to accomplish
an assigned task
• Apparent authority-when conduct
of an agent causes a third party to
believe the agent has authority to
transact business of the principal
• Even if no actual or apparent
authority, the principal can ratify
the action of the agents or a
transaction the agent has made
Agency Authority (cont.)
• Principal will be obligated as if
authority existed at the time the
transaction was made
• Principal must have all of the
material facts concerning the
transaction
• Principal must indicate thru
words or conduct that he/she
intends to be obligated in the
transaction
• Misrepresentation of agents can
also bind principals
Torts Committed by Agents
• Vicarious liability -when an agent commits a tort or misdeed while
performing duties for the principal, the principal may be liable to the
injured party for the damages that result
• Agent is always liable first to the injured
party
• Must determine whether the agent is a servant because
P can control
Torts
Committed
by Agents
(cont.)
• Agent must be in the scope of employment
• Scope of employment-determined by the
job the agent was to perform and whether
or not the agent was on business of the
principal when he/she caused the injuries
• Time and space limitations on agents
whereabouts are used
• Distinction between detour/slight deviation
and frolic
Did the Agent
Act “Within the
Course and
Scope of
Employment”?
Factors
Employer
Liable
Employer
NOT Liable
Was Employee’s act authorized by
Employer?
Yes
No
The Time place and purpose of act
(factually based)
?
?
Was act commonly performed by
Employees?
Yes
No
Did act advance Employer’s interests?
Yes
No
Did Employer furnish instrumentality
(tools)?
Yes
No
Did Employer have reason to know
Employee would do the act?
Yes
No
Did the act involved a serious crime?
No
No
Agents for a Business Enterprise
• All business relationships