Question

A few years ago, the Boston Globe reported that the city of Boston planned to spend $14 million dollars to convert the FleetCenter sports arena and entertainment center into an appropriate venue for the Democratic National Convention. The city engaged Shawmut Design and Construction into a contractual relationship to complete the work, which was supposed to start 48 days prior to the commencement of the DNC on July 26th. However, when negotiations between the Boston's mayor office and the police union broke down, the Boston Police Patrolmen's Association took to the picket lines surrounding the FleetCenter and prevented construction crews from beginning the work. A truck attempting to deliver steel was forced to turn around by the picketing union members and on duty cops that were instructed to prevent pickets from restricting access, did not intervene. Given the tight construction schedule, construction delays cost about $100,000 per day. Identify the principal-agent problem in this situation

Answer 1

"Asymmetric information is defined as the gap or imbalance between the borrowers and the purchasers on the financial markets.

There are asymmetric details since the business management has no motive to increase the shareholders ' benefit or income and behaves in his interests. This is termed as the "principal-agent" problem.

This problem happens when the owners do not have full information regarding their managers ' actions or motivations

When the agent(s) decides to function in favour of the principal(s) in exchange for certain rewards, a principal-agents problem arises. An arrangement on contracts between them could contribute to enormous costs for the contractor, contributing to moral hazard issues and conflict of interest.

The asymmetric information problem is moral hazard. A person participates in a more risky investment or event knowing that they are protected from the risk, when someone else bears the cost.

The issues of asymmetrical knowledge get worse through conflicts of interests between owners and managers as it is almost certain that the boss should behave in his or her favor.The principal agent problem is between on-site police (agent) and the local officers recruiting them (principals)

Police officers in operation had to stop blocking staff ' entrance to picket lines. Members of the police union use opportunistic action to improve their negotiating power.