Question

In public stock companies, which of the following expectations of principals is most likely to lead to principal-agent problems?A) The expectation that the agent will follow the country's laws and regulationsB) The expectation that the agent will go above and beyond the call of dutyC) The expectation that the agent will reconnect economic and social needsD) The expectation that the agent will act in the principal's best interest

Answer 1

Answer:

C

Explanation:

The principal-agent problem is the conflict of interest that occurs between the principal and the agent. The principal expects the agent to act in his best interest but this might not be the case as the agent might pursue his own personal interest to the detriment of the principal.

For example, an agent might take on a project that has a negative NPV because he wants to increase the amount of project he handles so he would appear more important. This would be at the detriment of the principal but an advantage to the agent