Question

Think back to the last time you ate at an expensive restaurant where you paid thebill. Now think about the last time you ate at a similar restaurant, but your parentspaid the bill. Did you order more food (or more expensive food) when your parentspaid? Explain how this relates to the agency problem in corporations.

Answer 1

The agency problem leads an individual (in your case) and corporate managers (in the corporate setting) to put their own self-interest ahead of the interests of the shareholders (your parents in your case).

In both situations there may be a lack of interest in controlling costs if those costs are not borne directly by the person making the decision.

When you would be payina bill you will order less food and when your parents paying the bill you may order more food because parents are paying for that. Same way in organisation the manager just take decisions all the costs are ultimately borne by Share-holders manager may spend more(like we order more food when we are not paying).