What role does reputation have in solving principal-agent problems?

Question

Quizplus · Accepted Answer

Reputation plays a crucial role in solving principal-agent problems by enabling principals to pick better agents. If an agent has a good reputation for being trustworthy and performing well, then the principal is more likely to select them. This reduces the risk that the agent will shirk their duties or engage in other opportunistic behaviors, which ultimately benefits both parties. Reputation can also serve as a deterrent to bad behavior, as agents who engage in unethical behavior risk damaging their reputation and losing future business opportunities.

What Role Does Reputation Have in Solving Principal-Agent Problems