Explain the principal/agent problem encountered by ...

[Davideckstein7]

Explain the principal/agent problem encountered by corporations.

Question 2

A problem associated with the principal-agent relationship is
 A) imperfect information.
  B) perfect information.
  C) the low costs of monitoring behavior.
  D) none of these choices.

[Fayaz00962]

Answer to Question 1

Shareholders are principals and directors are their agents. Shareholders want decisions from the board of directors that maximize the value of their shares. As in other principal/agent situations, shareholders entrust others to perform tasks that they cannot easily monitor. Monitoring is costly, and evaluating the quality of the board's work is difficult because the best decisions in many business situations are seldom obvious, even in retrospect. As in other applications of principal/agent theory, random events can further compound the monitoring problem.

Answer to Question 2

A

[Davideckstein7]

Excellent

[epscape]

TYSM