Question 2 (25 marks) Define the agency problem and illustrate for what reasons (if any) it...

Question 2

Define the agency problem and illustrate for what reasons (if any) it might arise in each of the following types of business:

sole proprietorships
general partnerships
private limited companies
public limited companies.

Solutions

Expert Solution

Agency problem is defined as a situation in whicn an agent of an organisation use their authority for their own benefit rather than that of the pricipals.

Reason of agency problem in case of following types of business:

i)Sole proprietorships:Agency problem arises when there is separation of ownership and management of a business.In case of sole proprietorship,such separtion does not exist,thus there is no agency problem in sole proprietorship.

ii)In case of partnership ,agency problem arises when there is not sufficient incentives are given to the managers to encourage them to work in best interest of pricipals.

iii)Private limited companies:In case of private limited companies,the agency problem arises due to the issue with incentive and presence of discretion in task completion.

iv)In case of public limited companies,the agent has better information than the pricipal(Shareholders) about the relevant fact of the transaction.The principal is normally not in the position to ensure that the agent's performance was indeed in the best interest of the pricipal.

jeff jeffy answered 1 year ago

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