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Just-in-Time Workforce: Principal-Agent Problems Experienced by Small Businesses

Just-in-Time Workforce: Principal-Agent Problems Experienced by Small Businesses

1. Introduction

Overall, the Small Business Jobs Survival Act would dramatically alter the negotiation and survival rights of commercial tenants in New York City. The Act would provide greater security to commercial tenants in the city by ensuring a possibility of long-term, stabilized leases rather than leases primarily serving the interests of landlords and developers in highly competitive real estate markets. However, this security will come at a cost to the free-for-all environment of commercial land use in the city. Much is to be seen of the effect in the event of enactment.

Fixtures and structural improvements made by the tenant to the commercial space would become property of the landlord upon lease termination under the proposed provisions of the Small Business Jobs Survival Act. The landlord would need to provide a fair valuation and compensation cannot be unreasonably withheld.

If enacted, the Small Business Jobs Survival Act would provide that the minimum lease term is ten years, with an option to extend the lease for an additional ten years. However, this is not a mandatory term, and the tenant and landlord could agree to a shorter term provided it was included in an agreement outside of the provisions of the Act. The Act also would provide that fixed percentage lease increases are permissible and the tenant would have the right to protest any proposed increase. However, in enterprises (like farms and restaurants) where commercial sales are significantly linked to the value of the landlord’s property or where the landlord provides substantial financial assistance to the tenant (like construction or partial funding of capital expenses), the Act would provide that a fair and reasonable rent shall be set by arbitrators.

The Act would provide specific provisions for the process of lease renewal. Under the Act, the landlord would need to give notice of a proposed lease renewal at least 180 days before the existing lease term expires. The notice would need to state the rent amount for the renewal term and if the proposed rent is unacceptable to the tenant, the tenant would have the right to request arbitration within 60 days of receiving the notice from the landlord. If no agreement is reached, a binding arbitration would be initiated and, in certain circumstances, a lease commission would be created to regulate the arbitration process.

The Small Business Jobs Survival Act would provide more protections for small business owners in a city where the rising cost of land and the execution of leases too financially advantageous to landlords and developers have been cited to create an inherently anti-small business environment. If enacted, the Small Business Jobs Survival Act would supersede many terms found in commercial leases across the city. However, the tenant and landlord would have the ability to draft an agreement to operate outside the proposed protections.

The Small Business Jobs Survival Act is a legislative proposal in New York City intended to protect certain small business tenants from perceived oppressive lease provisions. Intro. 16-0842 (Jan. 17, 2017), also known as the “Small Business Jobs Survival Act” (the “Act”). The bill provides that certain commercial tenancies will continue on a month-to-month basis after expiration of the stated term of the lease, absent a written agreement by the landlord and the tenant to the contrary.

1.1. Background

Small businesses, in particular, often face principal-agent problems due to the nature of their business operations. Parsons and Correa (2007), cited in Menzies and Gavura (2014, p. 80), suggest that the “disciplining device” in the principal-agent relationship, either in the form of a contract, monitoring, or bonding, does not exist. Sears and Lambrinos (2006) mentioned that “without internal motivation, their employees would lag,” but again, internal motivation cannot be sustained in a principal-agent relationship. These views explain well the principal-agent problems, which are the misalignment of interests and incentives between the principal and the agent in a principal-agent relationship. There are many academic studies investigating the principal-agent matter in the business context, but very few focus on the unique perspective of small business operations. This could be due to the complexity of the business size and operation, thus generalization of the findings to fit all business types, which brings disinterest among the researchers. On the other hand, a just-in-time (JIT) workforce, which is the main object of the study, refers to a working arrangement that uses the right resources at the right time and place to facilitate easier, more efficient production. This type of workforce could be achieved by using technologies, such as an online system, which helps in scheduling the work to the workers based on availability. The “right resource” means the necessary tools or materials for production. The JIT workforce concept is very much related to industrial management and relevant to technology and operation management research, but not to the principal-agent studies. This leads to a knowledge gap in realizing the potential principal-agent problems discussed in the JIT work environment. Hence, the article would provide insight into the application of principal-agent theory in the small business environment and also fulfill the research gap in the area of studying the effects of JIT workforce in the particular business operation.

1.2. Purpose

The purpose of this study is to explore the principal-agent problems experienced by small businesses in the context of a just-in-time workforce. We aim to develop an in-depth understanding of how the dynamics of a just-in-time workforce give rise to various principal-agent problems in the employer-employee relationship. Through a closer examination of this important topic, we hope to offer valuable insights to help managers and policy makers in small businesses to deal with these problems. In particular, we seek to investigate the following research questions: 1) What are the root causes of principal-agent problems in small businesses? 2) How does the advent of a just-in-time workforce aggravate these problems? 3) What kind of challenges should employers and managers expect to encounter in a just-in-time workforce? And 4) What are the effective strategies to mitigate principal-agent problems in a just-in-time workforce? We start with the definition of principal-agent problems and a brief elaboration of what a just-in-time workforce entails in this modern era. Subsequently, we will identify and analyze the principal-agent problems in the context of a just-in-time workforce. Our study ends with some recommendations for addressing these problems and possible future areas to explore. Through this study, we hope to enlighten small business leaders on the pressing issues surrounding and ways to alleviate principal-agent problems. On the other hand, employees and job seekers can also benefit from a clearer picture of how to operate within a just-in-time work environment and mutual understanding for the different parties.

1.3. Scope

While the small businesses are the primary focus of this study, it was not possible to define any more specific criteria for the type of small business that could be included in the study. There are many different ways that a small business could be defined; for example in terms of its annual turnover, the number of people that it employs or its legal status, such as whether it is a sole trader or a partnership. In the absence of any universally agreed definition of a small business, it is almost impossible to compile a comprehensive list of all the different types of small business that could possibly be included in the study and use it to draw a random sample of small businesses. In practice, small businesses are likely to vary significantly on many different dimensions: some will be single person enterprises while others might have a dozen or more employees; some might be cash rich and others might be struggling to meet their financial commitments. It seems likely that the principal-agent problems that are the focus of this study could manifest themselves in many different ways, depending on the individual circumstances of the particular small business concerned and the nature of its business activity. The nature and extent of such problems may also be heavily influenced by a wide range of additional factors, such as the broader economic environment, the prevailing culture of the industry in which the small business operates and the particular mix of contractual relationships that the business has with third parties. Last, the implications of these differences between small businesses for the likelihood of encountering and the possible effects of principal-agent problems are issues which are returned to in the main body of the dissertation. However, within the scope of a study of this size, it was clearly not feasible to undertake a detailed, comparative analysis of the principal-agent issues affecting a wide range of different types of small business. Therefore, it was decided to concentrate on those problems which are more likely to arise in and have a more significant impact on relatively more complex forms of small business organization, such as companies and limited liability partnerships, where ownership and control are separate, which generally require a formal system of internal governance. The next section outlines how data for the study have been collected and will explain why it was necessary to adopt a multi-method approach. It will also give some information about the approach that has been taken in analyzing the data. Overall, while the strength of the conclusions drawn from the study will to some extent rely on the ability to generalize the findings from the small samples studied to the population at large. The main focus in this report will be upon understanding how the phenomenon of principal-agent problems is given expression in the small business context, rather than testing the extent to which any particular theory may be verified by the data.

2. Principal-Agent Problems in Small Businesses

2.1. Definition

2.2. Causes

2.2.1. Lack of Information

2.2.2. Asymmetric Information

2.2.3. Moral Hazard

2.3. Impact on Small Businesses

2.3.1. Decreased Efficiency

2.3.2. Increased Costs

2.3.3. Loss of Control

3. Just-in-Time Workforce

3.1. Definition

3.2. Benefits

3.2.1. Cost Savings

3.2.2. Flexibility

3.2.3. Increased Productivity

4. Principal-Agent Problems in a Just-in-Time Workforce

4.1. Challenges

4.1.1. Lack of Trust

4.1.2. Communication Issues

4.1.3. Monitoring Difficulties

4.2. Strategies for Mitigation

4.2.1. Clear Expectations

4.2.2. Performance Incentives

4.2.3. Regular Feedback

5. Conclusion

5.1. Summary of Findings

5.2. Recommendations

5.3. Future Research


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