Question

The possibility of conflict of interest between the owners and management of a firm is called the agency problem.

Answer 1

Yes, it is true that the possibility of conflict of interest between the owners and management of a firm is called the agency problem.

As we know that management works as an agent of owners, in other words we can say that management is responsible for handlling the all business affairs on behalf of the owners. Hence there is agency relationship between owners and management. But such agency relationship does not run always smothly because sometime management gives preference to its own interests over interests of the owners that is why agency problems arise in such case. Thus we can say that clash of interests between management and owner is known as agency problem.