An Agency Problem?
Kevin Drum wonders whether the proposed $700 million bid by Farmers Insurance for naming rights on a prospective LA NFL stadium makes any economic sense. It is an interesting question. I wrote:
This has always struck me as one of those agency problems, where the executive's incentives are different from the shareholders. Executives get a ton of benefits personally from this -- higher profile for the company which improves their profile and marketability, they get a prime box for the games, parties, etc.
Before the audience here slips into a round of corporate executive bashing, my sense is that the same perverse incentives are working for municipal leaders who have a mismatch with taxpayer interests when they shove huge amounts of taxpayer funds to owners in stadium deals (deals which economists speak with one voice on -- they never pay off for the community in full). One of the dirty secrets of these deals is that they generally include a sort of kickback in the form of boxes and club seats for the Mayor and city council's use (and sometimes multiple boxes for leaders of other government agencies in the town).
Don:
"Farmer's Field"? Nice name, but I don't see 'Farmers Insurance' (the company's name) in there, so how does this help them? If I hadn't read this, when I heard "Farmer's Field" I'd have thought they were honoring local agribusiness. Weird.
February 1, 2011, 11:56 amMatthew Brown:
Well, this explains why there was an airship with 'Farmers' on it circling that part of LA today. I was wondering what on earth could be going on, because it's too early in the day for a sporting event that they'd want the skycam (and Staples Center is closed-roof anyway) and there weren't anything I could see going on politically or newsworthily or that'd have a bunch of people around to see the ad.
I agree with Coyote that it's an agency problem, and as much an executive perk as good advertising.
And it's not like LA lacks for good football, what with two competitive college teams; both the Trojans and Bruins are worth a ticket.
February 1, 2011, 4:53 pmJohn Moore:
There seem to be a lot more agency problems in general with big business execs than we had in the past. All you had to do (pre-crash) was watch all the biz-jet traffic at Scottsdale Airport to realize that there are a lot of people whose time has a "value" far in excess of what it would be without the agency problem that has created the outrageously exaggerated executive pay scales we see today.
This problem is a blot on capitalism, and at least in part seems to be caused by "rational ignorance" on the part of small shareholders (who mostly own stock through intermediaries) and in a large part by the perverse incentives operating on various fiduciaries - such as fund managers - who have no problem rewarding their fellow financial class buddies who are executives of companies they have large stakes in.
If this doesn't settle down, people will demand, and get government intervention in the area.
An interesting problem.
February 1, 2011, 10:27 pm