Which of the Following Is an Example of a Principal-Agent

question 8

Multiple Choice

Which of the following is an example of a principal-agent problem?

• A) A buyer who makes a large raise in bid at an auction to discourage other bidders.
• B) A doctor who performs a large number of in-office tests and is paid per test.
• C) An elderly couple who elect a generous medical insurance policy.
• D) A board of directors that is trying to refine the compensation system for its CEO.
• E) A pitcher (about to sign with a new team) who is aware of a nagging elbow pain.

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Definitions:

Principal-Agent Problem

A dilemma in economics and organizational theory where one party (the agent) is expected to act in the best interest of another (the principal) but may have personal interests that conflict.

Corporate Managers

Individuals at high levels within a corporation who are responsible for making strategic decisions and ensuring the company's objectives are met.

Corporate Owners

Individuals or entities that legally possess shares of stock in a corporation, granting them ownership stakes in the company.

Individual Accountability

The principle that each person is responsible for their own actions and may be required to explain them when necessary.