Monitoring costs are:
A)the costs of a failure in bargaining.
B)rarely incurred in contracts between a principal and an agent.
C)the insurance costs of guaranteeing that the principal will not incur a cost of contract failure.
D)the costs of reviewing and overseeing the actions of an agent.

Question

Quizplus · Accepted Answer

Monitoring costs refer to the costs incurred in overseeing and reviewing the actions of an agent to ensure that they are acting in the best interests of the principal. This is important in agency relationships where the agent has more information and discretion than the principal. In order to reduce the risk of opportunistic behavior by the agent, the principal incurs monitoring costs to keep the agent in check. Therefore, option D, which defines monitoring costs as the costs of reviewing and overseeing the actions of an agent, is the best choice. Options A, B, and C are incorrect as they do not accurately define monitoring costs.

Monitoring Costs Are