Question

The principalagent problem arises when ________.

A) There is a conflict of interest between a principal and an agent due to misaligned goals or incentives.
B) Both the principal and agent have congruent objectives.
C) The principal directly controls the agent's actions without any conflicts.
D) The agent has complete autonomy and control over the principal's objectives.

Answer 1

The principal-agent problem arises when there is a conflict of interest between a principal and an agent due to misaligned goals or incentives. This problem is prevalent in various business scenarios, such as when shareholders entrust company managers to make decisions that maximize shareholder value.

Step-by-step explanation:

The principal-agent problem arises when there is a conflict of interest between a principal and an agent due to misaligned goals or incentives. This is option A. The principal-agent relationship occurs when one party, the principal, delegates decision-making authority to another party, the agent. The agent is expected to act on behalf of the principal, but their interests may not always align. This problem is prevalent in various business scenarios, such as when shareholders entrust company managers to make decisions that maximize shareholder value.