When a principal-agent problem occurs, the agent engages in actions that
A)the principal can't observe, and they are not in the principal's best interest.
B)are impulsive rather than planned and that end up working against the agent's best interest.
C)are based on risk aversion rather than the principal's best interest.
D)result in lemons that harm the agent rather than the principal.

Question

Quizplus · Accepted Answer

In a principal-agent problem, the agent has an information advantage over the principal and may engage in actions that are not in the principal's best interest and that the principal cannot observe. This can lead to a situation where the agent prioritizes their own interests over the principal's interests, which can cause a conflict. Option B is not correct as the agent's actions are typically planned rather than impulsive. Option C is also not the best choice as risk aversion can be a rational response to uncertainty, and it may not necessarily be against the principal's best interest. Option D is incorrect as "lemons" refer to the problem of asymmetric information in the market for goods, not principal-agent problems.

When a Principal-Agent Problem Occurs, the Agent Engages in Actions