Question

1. Explain what the principal agent problem is. Suppose you have a teacher who only talks about his private life in class rather than teaching. What are some ways the college can insure that their teachers are teaching?

Answer 1

The principal-agent problem is a conflict that arises due to different priorities between a person or a firm owner or sometime a group of the owner and the representative authorized who act on their behalf. Thus an agent may act in a way that is contrary to the best interests of the principal. The principal-agent problem depends on the possible roles of principal and agent in the firm, and It can occur in any situation in which the ownership of an asset, is in direct control over another party, or agent. The principal-agent problem has become a standard factor in political theory and financial matters. The hypothesis was created during the 1970s by Michael Jensen of Harvard Business School and William Meckling of the University of Rochester. In a paper distributed in 1976, they illustrated a hypothesis of a possession structure intended to stay away from what they characterized as organization cost and its motivation, which they recognized as the division of proprietorship and control.

Consistently, the principal can't continually monitor the agent activities. The hazard that the agent will avoid a duty, settle on a poor choice, or in any case demonstration in a way that is in opposition to the principal wellbeing, can be characterized as excess costs. Extra organization expenses can be caused while managing issues that emerge from a specialist's activities. Office costs are seen as a piece of exchange costs. excess expenses may likewise incorporate the costs of setting up budgetary or different impetuses to urge the agent to act with a certain goal in mind. Principals are eager to hold up under these extra expenses as long as the normal increment in the arrival on the venture from recruiting the agent is more noteworthy than the expense of employing the principal, including the organization costs.

To conquer the principal-agent problem, the principal should burn through cash on observing and giving motivating forces to laborers. "Notwithstanding, it is commonly outlandish for the principal or the agent at zero expense to guarantee that the agent will settle on ideal choices from the principal perspective. concrete Performance Related Pay, A straightforward answer for giving the agent a motivator to buckle down. Nonetheless, it relies upon how Performance Related Pay is executed. Without adequate adaptability, it can make a strain in the work environment and diminish co-activity. Additionally, here in the college as a teacher performance can easily be evaluated by the student knowledge and their performance thus, in this case, performance-based pay is the best way to control the problem as it comes under a few occupations that are reasonable for target assessment.