The principal-agent problem arises in labor markets because
A) a firm may realize excessively large profits.
B) workers may provide less-than-expected work effort.
C) compensating wage differences do not pay for differences in the nonmonetary aspects of jobs.
D) human capital investments vary among workers.

Question

Quizplus · Accepted Answer

The principal-agent problem arises in labor markets because the employer (principal) and employee (agent) have different incentives and objectives. The employer wants the employee to produce a certain level of output, but the employee may have incentives to shirk or provide less effort than expected, resulting in lower productivity and profits for the firm. This is known as the "agency cost," which arises due to the information asymmetry between the employer and employee. The other options (A, C, and D) are not directly related to the principal-agent problem in labor markets.

The Principal-Agent Problem Arises in Labor Markets Because