The problems that arise when a principal hires an agent to do something on their behalf but the principal cannot perfectly observe the agent's actions is known as _____ problem.
A)an adverse selection
B)a principal-agent
C)a risk-averse
D)a fundamental agency

Question

Quizplus · Accepted Answer

This is a classic description of a principal-agent problem, which arises when there is asymmetric information between the principal and agent. In this case, the principal cannot fully observe the agent's actions, leading to potential conflicts of interest and moral hazard. Adverse selection refers to a situation in which one party has superior information before a contract is signed, while risk-aversion refers to a preference for risk-averse outcomes. Fundamental agency is not a commonly used term in economics or business.

The Problems That Arise When a Principal Hires an Agent