The principal-agent problem means that managers must
A) find ways for managers to get people to buy stock in their company.
B) devise compensation rules to induce principals to act in the best interest of agents.
C) devise compensation rules to induce agents to act in the best interest of principals.
D) find efficient agents who will negotiate fair compensation rules for a firm's principal managers.

Question

Quizplus · Accepted Answer

The principal-agent problem arises when agents (e.g., managers) have different interests than principals (e.g., shareholders). To align these interests, compensation rules are devised to incentivize agents to act in the best interest of principals.

The Principal-Agent Problem Means That Managers Must