Question

"B) Recall the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar restaurant, but your parents paid the bill. Did you order more food (or more expensive food) when your parents paid? Explain how this relates to the agency problem in corporations.

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Answer 1

When a person goes to an expensive restaurant and the parents pay, this person is likely to order more food than if this person goes and pays himself or herself.

This is because in the first case we have the agency problem, because the principal, the parents, and the agent, the child, do not always act on each other best interests.

In the second case, on the other had, this problem does not exist because principal and agent are the same person, since the person who orders is the same person who pays.