The principal-agent problem, as applied to the management of a company, would have the
A) stockholders as the agents and the managers as the principals.
B) company as the principal and the customer as the agent.
C) stockholders as the principals and the managers as the agents.
D) customer as the principal and the company as the agent.

Question

Quizplus · Accepted Answer

In the management of a company, the ownership of the company is held by the stockholders who entrust the management of the company to the managers. The stockholders are the principals who delegate authority to the managers who are the agents. The principal-agent problem arises because the interests of the agents and principals may not always be aligned. The managers may act in their own interest rather than the interest of the stockholders, which can cause conflicts. Therefore, C is the correct answer.

The Principal-Agent Problem, as Applied to the Management of a Company