Question

A key aspect of the​ principal-agent problem is that

A. the principal is always​ risk-averse.

B. the output level does not depend on the​ agent's actions.

C. the principal cannot perfectly monitor the​ agent's actions.

D. the principal can perfectly monitor the​ agent's actions.

Answer 1

The principal agent problem occurs when the agent takes actuon for the principal on behalf of the principal. The main problem in this is moral hazard, the agent may not pursue the interests of the principal rather he works his own interests. The principal cannot always ensure that the agent's action.

Ans: C) The principal cannot perfectly monitor the agent's action.