Why does a principal-agent problem create transactions costs? If the goal is economic efficiency, what liability rule should be used when a principal-agent problem exists?
What will be an ideal response?
When a principal-agent problem exists, the agent's behavior cannot be fully monitored by the principal. If the two parties reach an optimal contract, the principal has no guarantee that the agent is fulfilling his part of the contract, which constitutes a transactions cost of enforcing the contract. To achieve economic efficiency, liability should be assigned to the agent since his behavior is unobservable. The liability then gives the agent an incentive to pursue an optimal outcome. The principal does not need the incentive provided by liability, because private bargaining with the agent will give the principal an adequate incentive to pursue efficient behavior.
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The growth rate of real GDP in Astoria is 7.5%. Assume the growth rate of velocity is 0%
If Astoria wishes to decrease the inflation rate from the annual rate of 5.99% to a target rate of 4.5% and maintain its current growth rate of real GDP, by how many percentage points will the growth rate of the money supply need to change? A) -3 B) -2.99 C) -1.49 D) 2.99
Suppose milk and cereal are compliments and the demand for milk is Qdm = 40 - 6Pm - 2Pc, where Qdm stands for millions of gallons of milk demanded, Pm stands for the price of milk and Pc stands for the price of cereal. The supply of milk is Qsm = 6Pm - 8, where Qsm stands for millions of gallons of milk supplied. The demand and supply of cereal are Qdc = 90 - 5Pc - Pm and Qsc = 5Pc - 10, respectively, where Qdc stands for millions of boxes of cereal demanded and Qsc stands for millions of boxes of cereal supplied. Which of the following gives the market-clearing curve for milk?
A. Pm = 4 - (Pc/6) B. Pm = (32/12) - (Pc/6) C. Pm = (32 - 2Pc)/12 D. Pm = (32/12) + (Pc/6)
What basket of goods and services is used to construct the CPI?
a. a random sample of all goods and services produced in the economy b. the goods and services that are typically bought by consumers as determined by government surveys c. only food, clothing, transportation, entertainment, and education d. the least expensive and the most expensive goods and services in each major category of consumer expenditures
Economic theory states that losing comparative advantage in one good means creating a comparative advantage in another. This suggests that:
A. those who experience the transition may find it difficult in the short run. B. in the long run people may not like it, but no one will complain in the short run. C. outsourcing will always be good for every member of a society. D. it can be seen as a success in the short run.