Naked Economics Chapter 2: Incentives Matter

In today's business world, there is an immense amount of greed occurring. Incentives daunt CEO's and managers to commence actions for themselves; causing the workers to be financially disadvantaged and the company to head towards future failure. These drastic chain effects can occur in multiple ways, but a main approach is managers hiring workers and offering stock options. These options can seem extremely beneficial and cheap such as a ten dollar stock being sold for only five dollars--making the purchasers think that they have gotten maximized utility--, but in the long run the outcome won't be so pretty. Workers purchasing stocks cause the company to raise in per share price while outside investors are persuaded to buy into the company due to its rising prices. The sum adds to a magnificent golden river for the big share holders of the company. While share owners have dollar signs in their eyes, they don't even bother stressing about the company's future such as doing creative destruction. Not wanting to fund money to improve products makes other companies have an advantage in the same field to take over the business and sell better products. As the big shareholders of the company recognize the diminishing income of their company they recognize the incentive: leave the business and take the other shareholders' money. This action would greatly benefit them, but on the other hand workers would lose tons of money and be jobless. Of course, these types of actions are illegal to commit and are called accounting fraud. The policy of accounting fraud penalties can lead to many years in prison with a bonus of a certain amount of money owed back to the government, but some CEO's and business owners look at the trade-offs and consider it worth the risk. Though in my opinion, I think that it is an idiotic and unethical risk. A company that has gone IPO and has the capability to give stock options is surely making a fair amount of money; why not focus on improving the company while benefiting the workers? In business my philosophy is to always be ethical no matter what. In order to prevent accounting fraud, the government should require companies to submit data on reasons why their stock is increasing in price in order to avoid stolen money. This technique will ensure security for the workers and investors. Overall, I think that companies that have been successful in accounting fraud are geniuses because they are successfully able to persuade investors from all over the nation and the world to invest, but analyzing the trade offs make me come to conclusion that it's not worth going to jail and being in debt for the rest of your life.