Question

1. Why is the principle agent-problem important in economics?

2. what two critical assumptions underlie the principle agent-problem?

3. Provide two critiques or counters of the assumptions outlined above.

Answer 1

1. The problem with the principal-agent arises when a principal assigns an action to another person (agent), but the principal does not have complete information on how the agent will behave. Second, the principal's interests diverge from the agent's interests, meaning the result is less favorable than intended by the principal. For example, a shareholder (principal) wants to maximize profits for his business. He hires a (agent) manager to run the business. Nevertheless, the owner can not really know how hard the agent works and to what degree the manager fulfills the contract, due to the agency costs. The boss also doesn't have the same value in maximizing profits in this situation

2. The principal-agent theory brings up certain hypotheses about people, organizations and information when determining the most efficient contract. This means agents and supervisors are behaving in their self-interest to improve their own interests. Agents have more knowledge than their chieftains do. As a result, two impediments to successful contractual performance are identified: moral hazard, and adverse selection. Moral hazard refers to the fact that the agent does not put the effort into the activities decided upon. That is, they're shirking the handler. Adverse selection refers to "lack of ability

3. Conflict on goal. "On the marketplace, managers and agents simply have different goals and/or preferences"Only agents want to make as much money as possible, but the managers want to pay as little for services as possible. The same thing as in the public sector. The government wants as much public goods as possible to be produced, while the agents of the contractor plan to reduce the cost as much as possible. Therefore, the maximum interest of the principal could not necessarily lead to the maximum interest of the agents in a contract relationship

The Asymmetry of Data. Information asymmetry is a basic principle of the model of the principal agent. The asymmetry of information is essentially the assertion that agents possess more information than their principals possess. "When the distribution of information between principal and agent becomes asymmetric, the" classic "main-agent problem arises. The question posed here is how to prevent information asymmetry so that the managers know to what degree the agents have accomplished the goals of the managers, what agents are doing and what is not