Final Answer:
False. The root cause of agency problems extends beyond conflicts of interest and encompasses factors like information asymmetry and moral hazard. Thus the given statement is false.
Step-by-step explanation:
The root cause of agency problems isn't solely conflicts of interest but encompasses various factors contributing to the principal-agent relationship's inefficiencies. While conflicts of interest are a significant factor, other elements like information asymmetry, differing risk preferences, and moral hazard also play crucial roles in creating agency problems.
Firstly, conflicts of interest indeed pose a substantial challenge in the principal-agent relationship. When the interests of the principal (owner/shareholders) and agent (management) diverge, such as in cases of executive compensation or decision-making, conflicts arise. However, to attribute agency problems solely to conflicts of interest oversimplifies the complex nature of these issues.
Secondly, information asymmetry, where the agent possesses more information than the principal, contributes significantly to agency problems. This imbalance can lead to adverse outcomes as agents might act in their own interest, neglecting the principal's objectives. Additionally, moral hazard, where agents take risks knowing the principal bears consequences, exacerbates agency problems beyond mere conflicts of interest.
In conclusion, while conflicts of interest are a significant aspect of agency problems, they are not the sole root cause. Understanding the broader spectrum involving information asymmetry, differing risk preferences, and moral hazard is crucial in addressing and mitigating these challenges within the principal-agent framework.