According to agency theory, employment contracts will trade off _____.

Question

Quizplus · Accepted Answer

Agency theory suggests that employment contracts aim to balance three factors: incentive (providing motivation for agents to work hard and achieve goals), risk (managing the risks involved in the principal-agent relationship), and the cost of measuring performance (ensuring that principals are able to accurately evaluate agent performance). Option A correctly lists these three factors. Option B is incorrect because it includes "uncontrollable factors," which are not part of the agency theory framework. Option C is very close to the correct answer, but misses out on the important factor of the cost of measuring performance. Option D includes the cost-benefit tradeoff, which is not specifically mentioned in agency theory, and does not include incentive as a core factor.

According to Agency Theory, Employment Contracts Will Trade Off _____