Question

Define agency costs and discuss two ways in which these costs affect the value of a business How does the concept of agency costs apply to the issue of Assignment of Benefits (AOB)?

Answer 1

The agency cost can be defined as the internal expenses that could result from the different actions that are taken by the agent on behalf of the principal. The different elements that can contribute to the agency costs are dissatisfaction, core inefficiencies, disruptions, These agency costs will also include the different types of fees related to the management of requirements of the conflicting parties which are termed as agency risk

These types of costs really hamper the overall value of the business as any type of inappropriate action or decision was taken by the agent can result in loss of reputation and other types of financial costs to the business.

The assignment of benefit is the authorization by the principal to take the benefit of any process or initiatives by the agent. If there is a lot of agency cost involved , the overall assignment of benefit will result in negative as the benefits will be balanced by the agency cost