What is the principal-agent problem? What are three ways in which firms try to cope with it?

What is the principal-agent problem?

What are three ways in which firms try to cope with it?

The principal-agent problem is the problem of

A. devising compensation rules that induce an agent to act in the best interest of a principal

B. the principal stock owner of a firm finding an agent at the NYSE who will manage his account

C. the agent setting prices that will benefit the principal

D. communicating the principal's wishes to the agent

Three ways of attempting to cope with the principal-agent problem are

A. ownership, incentive pay, and long-term contracts

B. ownership, more holiday time, and long-term contracts

C. using a managerial hierarchy, incentive pay, and long-term contracts

D. ownership, incentive pay, and more holiday time

Expert Solution

The principal-agent problem is the problem of devising compensation rules that induce an agent to act in the best interest of a principal . Hence,option(A) is correct.

Three ways of attempting to cope with the principal-agent problem are ownership , incentive pay and long term contracts. Hence,option(A) is correct.

Rahul Sunny answered 2 years ago

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