Question

Angela has hired Mike to babysit her daughter. Angela knows that it is difficult to get her daughter to go to bed because she cries and screams at bedtime. But when her daughter stays up late, her daughter will not get up the next day when Angela tries to get her up. Mike, who will have gone home, does not have to get Angela's daughter up in the morning. And so he does not care if it is difficult to get Angela's daughter up for school. Angela is therefore worried that Mike will allow her daughter to stay up late so that he does not have to deal with the daughter's crying that night.

In this problem, who is the principal?

Angela's daughter

Angela

Mike

In this problem, who is the agent?

Angela's daughter

Angela

Mike

Continuing from the previous problem

In this problem, which of the following actions might better align Mike's and Angela's incentives.

	A.	Agree to pay Mike a bonus if her daughter gets up for school on time.
	B.	Ask Mike for a reference to check he is reliable.
	C.	Install a 'nanny cam" so Angela can check that Mike put her daughter to bed on time and not pay Mike if he fails to do so.
	D.	All of the above
	E.	Both A and C, but not B

Answer 1

In principal-agent relation, a principal is one who assigned someone to do the work on their behalf.

So, here, the principal is Angela.

And, the agent is Mike.

In this problem, the following actions might better align Mike's and Angela's incentives:

E. Both A and C, but not B.

This is because the main purpose for Angela to Mike is to get Angela's daughter sleep early so that she can go to school next day o time. And, if Mike did his job properly and get a bonus for that, then he will be encouraged to do so.

And, similarly, if there is a nanny cam installed, then Angela can monitor Mke's work.