An Extended Study Of The HU Theory

Since the inception of large-scale socialized production, enterprise system has undergone the evolution from individual ownership system to partnership system to corporate system, which is a course of transition from natural person enterprises to legal person enterprises. In this course, profound changes have taken place in the internal relationship of enterprises, and the principal-agent problem has thus risen, profoundly influencing the course of economic development.Western scholars have done a good quantity of studies on the principal-agent problem, but their studies are basically theoretical. Though enlightening to people's thinking, these theories are seldom practical. For example, according to the studies on the principal-agent issue done by Harris and Raviv in 1979, if the owner (principal) cannot observe the behaviors of the operator (agent) and the operator is risk-neutral, the best solution is for the owner to collect "fixed rent" from the operator.Obviously, the above "fixed rent" is the contract base. But Harris and Raviv have not been able to point out the critical problem of how to scientifically determine the base. Maskin and Tirol have discussed the course of negotiation over signing of contracts with the principal's private information, but they similarly cannot point out how to scientifically determine the base. Zhang Chunlin has pointed out that if the manager (agent) is risk neutral, "the shareholder (principal) can sign a contract with the manager to stipulate that the manager submits certain amount of profits to the shareholder, and the part exceeding the amount belongs to the manager while the part in short shall be supplemented by the manager. In other words, the manager acquires the right to seek surplus"; Zhang Weiying has also pointed out, "it is the best to grant the right of an enterprise to seek surplus (that is, balance after submitting profits) to the member responsible for operation decision making (that is, the agent)." However, they similarly has failed to point out the critical problem in practice, that is, what the amount of profits submitted (that is, the base) should be.To sum up, we can see that the core of principal-agent problem is determination of the base. There must be a base-determination problem when principal-agent problem involves quantification target such as profits, sales, etc. Because if the principal wants to give a quantification duty to the agent,he must determine the base. Completed or overfulfilled the base, the agent is considered to complete the profit task and is rewarded., But how to correctly definite the base? This is a worldwide problem. Why it is difficult to correctly determine the base is that the information asymmetry exists between principal and agent. Compared with the agent, the principal lacks the information obviously. Therefore, which countermeasures the principal and the agent should take when they carry out asymmetric information gambles is an urgent problem needed to solve. "United base determination Method" i.e. "HU theory" proposed by Professor Hu Zuguang is an effective device to solve this problem. This paper is about a further research based on the "HU Theory". The whole paper is divided into the following chapters:Chapter 1. Introduction. First, the selected topic of this paper is put forward and the theoretical and realistic significances of this research are established through an analysis of the realistic background and the theoretical background of the research. Next, the structural framework of this paper, the main contents of each chapter, and their internal logical relations are introduced. Finally, the methodology adopted for this research and main innovation points of this paper are presented.Chapter 2. Literature Review. Related articles are sorted out and summarized in order to lay a theoretical foundation for this paper. Section 1 gives a retrospection of the results and current situation of research on the principal-agent theory both at home and abroad. Section 2 mainly summarizes the past literature on the HU theory. It first offers an introduction of the main contents of the HU theory, then compares the HU theory with several domestic and foreign agent contracts, and finally analyzes all kinds of assessments made by specialists and scholars on the HU theory.Chapter 3. An Analysis of HU Theory under Adverse Selection. This chapter mainly describes the balance between the optimal rent extraction and allocative efficiency in the agent contract designed in the HU theory. First, we describe in detail the resource allocation set that can be accomplished by the principal. The incentive compatibility constraint and participation constraint together define the allocation set of feasible incentives. Second, an optimal plan under complete information and a suboptimal contract under adverse selection are constructed by establishing an optimal plan for the principal under incentive compatibility constraint. Finally, the established model mentioned above is used to analyze the principal-agent contract designed with the HU theory. The extent to which adverse selection influences the optimal output of the agent and the efficiency of transaction is discussed. Special focus is given to the way the principle judges and weighs the extraction of information rent and the efficiency of configuration in adverse selection.Chapter 4. An Analysis of HU Theory under Ethical Risk. First, a model used to analyze ethical risk is constructed in order to discuss the nature of an agent process within a two-effort/two-result framework. By describing a feasible incentive contract set with high-level incentives, we derive a reference optimal decision principle. Then this framework is used to discuss the agent contract constructed with the HU theory. This analysis is divided into two parts:the effect of ethical risk on the efficiency and transaction cost of HU contract when the agent is risk-neutral; the weighing and judgment of insurance and efficiency in HU contract when the agent is risk-avoiding.Chapter 5. An Analysis of HU Theory under Non-Verifiability. First, a non-verifiability analysis framework is established for the occasion where there is no prior contract between the principal and the agent. On the basis of this framework, the HU theory contracts for the risk-neutral agent and for the risk-aversion agent are respectively discussed. Finally a more in-depth discussion of the HU theory is made in order to probe into the execution of Nash Equilibrium in the contracts designed with the theory.Chapter 6. An Extended Analysis of HU Theory under Complex Circumstances. The incentive issue of agent contracts constructed with the HU theory is respectively discussed under three complex information problems, namely adverse selection that takes place before ethical risk, ethical risk that takes place before adverse selection, and ethical risk that takes place before non-verifiability.Chapter 7. Conclusion and Prospect. A conclusive statement is made of this paper:all conclusions derived by the author in the research are presented and issues that need further research are listed as reference for the readers and relevant researchers in subsequent research. The innovation points and deficiencies of this research are stated and the feasible directions of future research are proposed.The innovation points of this paper mainly include:The focus of this paper is to use the incentive contract theory-a frontier theory in economics-to carry out an in-depth research of the HU theory, establish a theoretical framework that can be used to analyze and interpret these problems on the basis of past research findings, construct an appropriate arithmetic model for quantitative analysis, and use these frameworks to improve and consummate the principal-agent model designed in the HU theory.(1) The balance between rent extraction and efficiency in the principal-agent relationship under adverse selection.(2) Analyze two basic conflicts under the ethical risk:balance between the extraction of limited-liability rent and efficiency and balance between insurance and efficiency.(3) Discuss the non-verifiability problem and check if this non-verifiability will affect the completeness of the contract, i.e. the principal has full capacity to make commitments in the prior contract and the contract can be executed by an impartial arbitration body. (4) Construct a mixed framework for reverse selection, ethnic risk, and non-verifiability; comprehensively consider the three incentive issues problems above:reverse selection that takes place before ethnic risk, ethnic risk that takes place before reverse selection, and ethnic risk that takes place before non-verifiability; analyze the HU theory under these three circumstances. Check if the conclusions derived from the simple model are still applicable to these more complicated circumstances. If not, discuss how to further improve the HU theory.