What Is a Principal-Agent Problem and Why Does It Create

question 38

Essay

What is a principal-agent problem and why does it create inefficiency? What are efficiency wages and how can they help correct principal-agent problems?

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Definitions:

Management Fees

Charges levied by management for the operation of an investment fund, company, or another entity, usually calculated as a percentage of assets under management.

Consolidated Retained Earnings

The portion of net earnings not paid out as dividends, but retained by the company to reinvest in its core business, or to pay debt, reported in the consolidated financial statements.

Subsidiary's Adjusted Income

The net income of a subsidiary company after making adjustments for fair value measurements, currency translation, and other accounting policies.

Dividends

Payments made by a corporation to its shareholder members, distributing a portion of the company's earnings.