Question

Principal Agent Problem - would you feel comfortable investing in a business that someone else is going to manage

Answer 1

No I will not feel comfortable. The reason is principal agent problem. The manager would most likely pursue goals or involve business in activities which are beneficial for him and not for me. This be may be at my expense. The manager may increase his salary, facilties, involve himself in nepotism, corruption etc. I may not get right information about these issues at right time due to asymmetric information. To avoid the situation I may have to increase agency costs which may be even quite high. Because of all these reasons I will not be comfortable. But that does not mean I will be totally averse to the idea. With right kind of contracts etc I can reduce the problems and engage in such venture