Asked by Susana Guerrero on Jun 27, 2024
Verified
A potential problem arises in principal-agent relationships
A) because the agents' actions are not always observed by the principals
B) because the principals' actions are not always observed by the agents
C) because the agent's and the principals' actions are always observed by each other
D) the observability of actions is irrelevant
Principal-agent Relationships
A framework within economics that describes the dynamics when one entity (the principal) hires another (the agent) to perform a task on their behalf, often involving delegation of decision-making authority.
Observability
The degree to which the internal states of a system are accessible to its external observation, often used in context of controlling complex systems.
- Recognize the differing goals of the principal and the agent in their connection.
Verified Answer
ZK
Zybrea KnightJul 03, 2024
Final Answer :
A
Explanation :
Principal-agent relationships involve a situation where one party (the principal) hires another party (the agent) to act on their behalf. The principal may not always be able to observe the actions of the agent, which can lead to a situation where the agent acts in their own interest rather than that of the principal. This is known as the principal-agent problem. Therefore, option A is the correct answer.
Learning Objectives
- Recognize the differing goals of the principal and the agent in their connection.