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What is an agency problem? What mechanisms could minimize these problems? Please explain

What is an agency problem? What mechanisms could minimize these problems? Please explain

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Answer #1

Agency problem arises due to conflict of interest between promoters of company or stockholders  and the management. The conflict arises due to interest of stockholder to maximize their own wealth whereas interest of manager will be to increase their own wealth.

This principal and agent conflict can be minimised by using contracts and laws . This would make the agents legally committed to the stockholders. Performance linked pay would motivate agents to work in sync with the owners and reduce agency problem.

Please Discuss in case of Doubt

Best of Luck. God Bless
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