Corporate Decision-Making and Self-Interest
A CEO of a publicly traded company faces a decision during an economic downturn. Option A is to lay off 10% of the workforce, which financial models predict will maximize short-term shareholder value and the CEO's performance bonus. Option B is to implement a company-wide pay cut, including for executives, to avoid layoffs. This second option is projected to maintain employee morale and long-term company stability but will result in lower short-term profits and a smaller CEO bonus. Based on the principle that 'every agent is actuated only by self-interest,' which option would an economic model based on this principle predict the CEO will choose? Justify your answer and then evaluate the potential shortcomings of this principle in explaining why a CEO might choose the alternative option.
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Introduction to Microeconomics Course
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Corporate Decision-Making and Self-Interest