Suppose a company's owners have a hard time observing whether management is acting primarily in its own interest or for the benefit of the company. This situation sets up a(n):
A) fiduciary responsibility conundrum.
B) principal-agent problem.
C) problem with inefficient loss aversion.
D) symmetry relationship.

Question

Quizplus · Accepted Answer

The principal-agent problem arises when the interests of the agent (management) and the principal (company owners) are not aligned, and the principal has a difficult time monitoring the agent's actions to ensure they are acting in the best interest of the company. This can result in the agent acting primarily for their own benefit rather than the benefit of the principal, which can lead to inefficiencies and reduced profitability for the company.

Suppose a Company's Owners Have a Hard Time Observing Whether