A principal-agent problem can arise when
A)a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agent's actions.
B)an agent hires a principal to do something on their behalf, and the agent can observe the principal's actions.
C)an insurance agent sells a policy to a buyer who uses it as an incentive to behave badly.
D)a principal uses an agent to accomplish a task the principal wants credit for completing.

Question

Quizplus · Accepted Answer

A principal-agent problem occurs when an agent is hired by a principal to perform a task on their behalf, but the principal cannot perfectly observe the actions of the agent. This creates a potential conflict of interest, in which the agent may act in their own self-interest rather than in the best interest of the principal. This problem is common in situations where incentives are misaligned, such as in corporate governance or public policy. Option B is incorrect because it describes a situation where the principal is being hired by the agent, which is not a principal-agent problem. Option C is incorrect because it describes a situation where the policy buyer is misbehaving, rather than the agent. Option D is incorrect because it describes a situation where the principal is seeking credit, which is not a principal-agent problem.

A Principal-Agent Problem Can Arise When