How do principal-agent problems cascade down the hierarchy in an organization? Describe an example of principal-agent problems. The example can be from your reading in this class, your reading outside of class, or your own experience.

Question

What will be an ideal response?

Answer 1

Student examples will vary. A sample answer follows.

Senior executives, such as the CEO, face agency problems when they delegate authority of strategic business units to general managers. Employees who perform the actual operational labor are agents who work on behalf of the managers. Such front-line employees often enjoy an informational advantage over management. They may tell their supervisor that it took longer to complete a project or serve a customer than it actually did, for example. Some employees may be tempted to use such informational advantage for their own self-interest.

An example of the principal-agent problem allegedly happened when Anthony Levandowski set up his own autonomous-vehicle company, Otto, while working at Waymo.