Question

Recall the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar​ restaurant, but your parents paid the bill. Did you order more food​ (or more expensive​ food) when your parents​ paid? Explain how this relates to the agency problem in corporations.

Answer 1

The agency problem in corporations is a conflict of interest. This particular conflict is related to any relationship where one party is expected to do something in another's best interests. Most common agency problem in a corporation is related to the company's management and the company's stockholders.

The tension in this conflict of interest was introduced when we ate at a fancy restaurant could be explained in how my parents choose what to order and what did I choose when my parents paid the bill. If I ordered something expensive from the menu the first time, they would ask me to order something similar when they invited me. We could measure the parties' interests according to what they order at an expensive restaurant for the first time and if they asked if they could order anything for any budget.