Final answer:
An agency cost refers to the cost incurred by a principal-agent relationship when the agent acts in their own interest, leading to conflicts and potential financial loss for the principal.
Step-by-step explanation:
An agency cost refers to the cost incurred by a principal-agent relationship. In this type of relationship, the principal (such as a company owner) delegates certain tasks and decision-making authority to an agent (such as a manager or employee). The agency cost arises when the agent acts in their own interest, leading to conflicts and potential financial loss for the principal. An example of an agency cost is when a manager uses company funds for personal expenses instead of investing in the growth of the business.