Question

What is the principal‐agent problem? Have you ever worked in a setting where this problem has arisen? If so, do you think increased monitoring would have eliminated the problem?

Answer 1

Workers are the agents hired to promote the interests of the firm's owners. Owners and workers both have a common goal in the survival of the firm, but their interests are not identical. A principal- agent problem arises when the interests of the owners ( principal) and workers ( agent) diverge. Workers may try to increase their utility by minimizing their responsibilities and providing Leasyeffort. Owners of firms may eliminate the worker who is not giving the full effort because the owner has incentive to earn more profit. Hiring more supervisory personnel Is an expensive task and there is no surity that it will eliminate the problem. Providing incentives or motivation to employees like profit sharing, performance-based bonuses appear to be more effective in eliminating the problem.