The principal-agent problem refers to the fact that firms must
A) choose between economic efficiency and technological efficiency.
B) choose between a managerial and an incentive system.
C) devise incentives to get employees to work in the best interest of the firm's owners.
D) choose between operating as a partnership or corporation.

Question

Quizplus · Accepted Answer

The principal-agent problem arises when there is a conflict of interest between the owners (principals) and the employees or managers (agents) of a firm. The firm must create incentives to align the interests of the agents with those of the principals to ensure that employees work towards the firm's goals.

The Principal-Agent Problem Refers to the Fact That Firms Must