economics hard True/False

The 'Principal-Agent Problem' arises when the agent (e.g., a corporate manager) possesses more information and acts in their own self-interest, potentially at the expense of the principal (e.g., the shareholders).

  1. True
  2. False

Answer: True

This problem is rooted in asymmetric information and misaligned incentives. Because shareholders (principals) cannot perfectly monitor the daily actions of the CEO (agent), the CEO might pursue empire-building, excessive perks, or short-term stock bumps that harm long-term company value. Corporate governance mechanisms, stock options, and audits are designed to mitigate this agency cost.

Topic Microeconomics - Information
Exam Relevance UPSC Prelims, Banking, SSC
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