In a Principal-Agent Problem,if the Contract Used Leads to the Maximum

question 13

Multiple Choice

In a principal-agent problem,if the contract used leads to the maximum of the principal's and agent's combined value (profits,payoffs) ,we can say that this contract features

• A) inefficiency in production, since only the principal's profits should be maximized.
• B) inefficiency in production, since only the agent's payoffs should be maximized.
• C) efficiency in production.
• D) inefficiency in production, since the agent's payoffs should be maximized and the principal's profits should be minimized.

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Definitions:

Specified Rate

A predetermined interest rate detailed in a financial agreement or instrument.

Liquidity Risk Premium

An additional return that investors demand for holding securities with low liquidity, compensating for the cost associated with the inability to quickly sell the asset.

Corporate Bond

A corporate bond is a debt security issued by a corporation to raise funding, which promises to pay back the principal along with interest at a specified maturity date.