The principal-agent problem arises primarily because
A) principals and agents share a common interest, leading to free-rider problems.
B) principals and agents are in an adversarial role, sharing no common interests.
C) principals pursue some of their own objectives, which may conflict with the objectives of the agents.
D) agents pursue some of their own objectives, which may conflict with the objectives of the principals.

Question

Quizplus · Accepted Answer

The principal-agent problem arises primarily because agents pursue some of their own objectives, which may conflict with the objectives of the principals. This conflict of interest can lead to issues with monitoring and controlling the actions of the agent, which in turn may lead to agency costs such as moral hazard or adverse selection. The principal-agent problem is thus a classic example of a situation where there is incomplete information and divergent incentives between different parties.

The Principal-Agent Problem Arises Primarily Because