Determine which is the principal and which is the agent in the following relationships and then briefly discuss the principal-agent issues for each.

The Principal-Agent Problem: Determine which is the principal and which is the agent in the following relationships and then briefly discuss the principal-agent issues for each.

a. A firm that produces good for export and the export management company that helps market its goods overseas

b. An employee-pension management firm and the company using its services

c. The management of a firm and its stockholders

Expert Solution

Identifying the principal and agent, and also possible issues that may arise:

a) A firm that produces good for export and the export management company that helps market its goods overseas

✓ in this statement, the firm producing the goods for exporting is the principal, and export management company, supporting the marketing of goods overseas is the agent.

✓ there might be issues like conflicts of interest, that could occur, if the management wants to maximize its gain, or the firm tries to directly export the goods of most profitable products, without involving the company.

b) An employee-pension management firm and the company using its services

✓ here, the employee pension management firm is the agent, and the company using its services is the principal.

✓ the principal agency relationship may have conflict of interest, that could arise when the agent company charges more for undertaking the work, or the company misuse the service for gaining benefits. Other issues like moral hazards could arise if any of the individual or company want to put down the other through torts and other illegal means.

c) The management of a firm and its stockholders

✓ the management of a firm is the agent, and the stockholders are principal.

✓ in this kind of relationship, usually the issue that concern to both of the parties, is the conflict of interest. Because, management want more earnings and stockholders want to increase their value of the shares. This may involve moral hazards when management use illegal or immoral ways to maximize their benefits.

keosha answered 2 years ago

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