Business And Growth

Question 1

What is the Principal-Agent problem?

Answer 1

The Principal-Agent problem occurs when the owners of a business (principals) are not in control of running the business, which is managed by agents.

This leads to a divorce between ownership and control.

Question 2

Who are the principal and agent in a business?

Answer 2

In a business, the owner is known as the principal and the manager is known as the agent.

This distinction is important in understanding the Principal-Agent problem.

Question 3

What can cause conflict between principals and agents?

Answer 3

Conflict can arise when principals (owners) and agents (managers) have different objectives.

For example, shareholders may want maximum profit while managers may prioritize sales growth.

Question 4

What is the impact of asymmetric information in the Principal-Agent problem?

Answer 4

Asymmetric information can lead to agents taking advantage of the difference in knowledge between themselves and the principals, resulting in conflicts of interest.

This difference in information can hinder principals from ensuring their interests are served.

Question 5

What is the relationship between profit maximization and the Principal-Agent problem?

Answer 5

Profit maximization can be affected by the Principal-Agent problem, as agents may focus on maximizing sales instead of profits, leading to lower overall profits.

This creates a conflict between the goals of shareholders and managers.