In a principal-agent problem,if the contract used leads to the maximum of the principal's and agent's combined value (profits,payoffs),we can say that this contract features
A) inefficiency in production, since only the principal's profits should be maximized.
B) inefficiency in production, since only the agent's payoffs should be maximized.
C) efficiency in production.
D) inefficiency in production, since the agent's payoffs should be maximized and the principal's profits should be minimized.

Question

Quizplus · Accepted Answer

If the contract used leads to the maximum of the principal's and agent's combined value (profits, payoffs), it means that both parties have an incentive to work towards this goal, which ultimately increases efficiency in production. This is known as a win-win situation, where both parties benefit from the contract. If the principal's profits were maximized at the expense of the agent's payoffs or vice versa, it would lead to a conflict of interest and a less efficient outcome. Therefore, option C is the correct answer.

In a Principal-Agent Problem,if the Contract Used Leads to the Maximum