Question

1.)Corruption is an example of agency costs.

a.True

b.False

2.)Two foremen work over-night in a plant that produces a consumer product. They decide to remove some of the finished product from the manufacturing floor before it goes to finished goods. They then sell the product on eBay. This is an example of what type of agency cost?

a.Shirking

b.Moral hazard

c.Stealing

d.None of the above

Answer 1

1) The statement is False

An agency cost is an internal company expense which stems out of the actions of an agent acting on behalf of a principal. Agency costs usually arise in the wake of inefficiencies and disruptions, such as conflicts of interest between shareholders and management.
Agency costs can be either:
A) the costs incurred if the agent uses to company's resources for his own benefit; or
B) the cost of techniques that principals use to prevent the agent from prioritizing his interests over the shareholders.
Since it is an internal company expense, corruption cannot be treated as agency costs.

2) The answer is Option C - Stealing.

Shirking is the act of working less when there is no chance of earning a higher return.

Moral hazard arises where it is difficult or costly for owners to observe or infer the amount of effort exerted by managers. In such a situation, there is an inevitable temptation for managers to avoid working to the terms of the agreed employment contract.

Stealing can be theft of cash, goods or other assets. Here, its a case of employee theft as the two foremen steals some of the finished goods and sells it on e-bay.