Any relationship in which one party, the principal, considers entering into a contractual agreement with another, the agent, expresses the principal-agent model.Regardless of the reason for relying on an agent, the principal faces what two problems?
A)Influence activities and the problem of vertical expansion
B)Design decisions and pricing decisions
C)Sunk costs and skimming
D)Adverse selection and moral hazard
E)Externalities and competitive bidding

Question

Quizplus · Accepted Answer

The two problems that the principal faces in a principal-agent relationship are adverse selection and moral hazard. Adverse selection refers to the problem of selecting the right agent, while moral hazard refers to the problem of ensuring that the agent acts in the best interest of the principal. These two problems may lead to suboptimal outcomes and result in a principal-agent problem.

Any Relationship in Which One Party, the Principal, Considers Entering