What is a principal-agent problem and why does it create inefficiency? What are efficiency wages and how can they help correct principal-agent problems?
What will be an ideal response?
A principal-agent problem occurs when an employer cannot fully monitor the actions of an employee. This situation is inefficient because the employer will be unaware of the worker's true productivity and thus cannot offer incentives for better productivity (or punishments for poor productivity). One way of dealing with principal-agent problems is to severely punish a worker who is caught shirking. However, the threat of firing does not give workers an incentive to avoid shirking if they can simply move on to another job. Efficiency wages are wages in excess of the equilibrium wage level and are thus high enough to create unemployment, so a fired worker may not easily obtain another job. Thus efficiency wages provide an incentive for workers to avoid shirking, even if their actions are not fully monitored.
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The main goal of macroeconomic research is to
A) predict how the macroeconomy will perform in the future. B) analyze current macroeconomic data. C) develop new data that can be used to understand better the operation of the economy. D) make general statements about how the economy works.
Which of the following is NOT consistent with the Permanent Income Hypothesis?
A. The theory would predict that people's consumption would be greater than their income until their mid to late 20s B. A person who won the lottery would spend only a small part of their winnings in the first year C. Consumption is smaller than income when people reach old age D. People gear their consumption to their expected earnings more than to their current income
If the supply curve for orange juice is estimated to be Q = 40 + 2p, then, at a price of $2, the price elasticity of supply is
A) .01. B) .09. C) 1. D) 11.
An economy in which a central authority draws up a plan that establishes what will be produced and when, sets production goals, and makes rules for distribution is a
A. free-market economy. B. laissez-faire economy. C. command economy. D. public-goods economy.