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

Question

Quizplus · Accepted Answer

Reputation plays a crucial role in solving principal-agent problems because it allows principals to choose agents who are trustworthy, reliable, and competent. By selecting agents with a good reputation, principals can reduce the risk of opportunistic behavior and ensure that their interests are aligned with those of the agent. Additionally, agents with a good reputation are more likely to attract high-quality contracts, which can increase their motivation to work hard and perform well. Therefore, reputation is an important factor in solving principal-agent problems, but it is not the only solution.

What Role Does Reputation Have in Solving Principal-Agent Problems