ECO 550 Week 9 Discussion

The Principle-Agent Problem, To Manage Incentive You Have to Understand Motivation.

What Is the Principle-Agent Problem? Here is some help. https://www.youtube.com/watch?v=cpu0dw9VY2E

This week we look at the principle-agent problem and what when wrong at Wells Fargo. On March 28, 2019 Tim Sloan the CEO of Wells Fargo, who was suppose to restore the bank’s reputation, stepped down. After a very poor showing by Sloan in testimony about the bank before Congress and with long-standing restrictions by the Federal Reserve still in place, the bank seems unable to overcome the crisis created by a whole collection deceptive practices which rose to the level of fraud. See https://www.americanbanker.com/news/fed-wont-lift-wells-fargo-cap-until-deficiencies-are-fixed-powell. On October 21, 2019 Charles Scharf officially assumed the role of CEO. Can he succeed in restoring the reputation of Wells Fargo as the bank that always does the right thing?

You are going to advise Mr Scharf on a key issue. What about the incentive system employed by Well Fargo resulted in massive creation of fake accounts by the retail operation and why did it only get worse from there? As you dig into this remember Froeb’s rule from Chapter 1“Avoid the temptation to think about the problem from the employee’s point of view…{and ask} how does the organization give employees enough information to make good decisions and the incentives to do so?” page 8