Which of the following must a principal do to reduce agency costs?
A)Encourage the agent to maximize his or her benefits
B)Provide complete autonomy to the agent
C)Discourage the agent from pursuing projects with high potential payoffs
D)Increase information asymmetry and goal congruence
E)Align the agent's interests with the principal's interests

Question

Quizplus · Accepted Answer

The principal can reduce agency costs by aligning the agent's interests with their own interests. This can be achieved through various incentive mechanisms such as performance-based compensation, profit-sharing, or employee stock ownership plans. By doing so, the agent is motivated to act in the best interest of the principal, thereby reducing the likelihood of shirking or opportunistic behavior. Encouraging the agent to maximize their benefits (A) or providing complete autonomy (B) may lead to excessive risk-taking or agency problems. Similarly, discouraging the agent from pursuing projects with high potential payoffs (C) may result in missed opportunities for value creation. Increasing information asymmetry and goal congruence (D) could worsen agency problems rather than reducing them.

Which of the Following Must a Principal Do to Reduce