Question

What is the situation in which an agent makes decisions for a principal potentially on the basis of personal incentives that may not be aligned with the principal's incentives?

a) Conflict of Interest
b) Principal - Agent Problem
c) Both a and b
d) Neither a nor b

Answer 1

which occurs when there is a divergence in the incentives and interests of a decision-making agent and the principal the agent is representing.

Step-by-step explanation:

The correct option : b

This issue emerges when there is a conflict of interest between the agent's personal goals and the principal's objectives, leading to decisions that might not benefit the principal to the fullest extent. In economics and organizational theory, Principal-Agent Problems arise when one person or entity (the agent) is able to make decisions on behalf of, or that impact, another person or entity: the principal.

This dilemma is rooted in the agent having potentially different objectives than the principal, along with asymmetrical information (the agent having more information), and it can lead to the agent making choices that aren't in the best interest of the principal. While conflicts of interest are a related concept, they specifically refer to situations where a party has competing interests or loyalties, which does not necessarily involve a principal-agent relationship.