The principal-agent problem:
A) is when the principal has more information than the agent.
B) is when the agent is tempted to put in more effort than the principal would like.
C) is commonly seen in the employer-employee relationship.
D) is when the principal and agent have the same objectives.

Question

Quizplus · Accepted Answer

The principal-agent problem is a situation in which the agent (employee) may act in its own interest instead of acting in the best interest of the principal (employer). This is commonly seen in the employer-employee relationship where the employer may not have complete control over the actions of the employee. Option A is incorrect as the problem arises when the agent has more information than the principal. Option B is incorrect as the agent may be tempted to put in less effort than the principal would like. Option D is incorrect as the principal and agent may not necessarily have the same objectives.

The Principal-Agent Problem