To Induce an Agent to Work Hard,a Principal May Offer

question 36

Multiple Choice

To induce an agent to work hard,a principal may offer the agent a bonus,in other words,an extra payment if a performance target is hit.Suppose that the agent's performance is affected by factors beyond the agent's control,for example umbrellas are demanded more on a rainy day.Under what conditions may the bonus not induce the agent to work harder?

• A) The agent is very risk averse.
• B) The agent is very risk loving.
• C) The agent is risk neutral.
• D) The principal is risk neutral.

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Definitions:

Commercial Substance

Commercial substance is a concept that a transaction significantly changes the economic position or cash flows of a company, beyond the mere transfer of assets or obligations.

GAAP

Generally Accepted Accounting Principles, a standard framework of guidelines for financial accounting that includes the details, complexities, and legalities of business and corporate accounting.

Intangible Assets

Intangible assets are non-physical assets having a useful life greater than one year, such as patents, trademarks, and goodwill, that a company owns and can create economic benefit.

IFRS

International Financial Reporting Standards, a set of global accounting standards for financial reporting.