Which problem arises when the managers of a company, acting as agents, pursue their own interests rather than those of the shareholders?
Answer and explanation
Correct answer: D. The agency problem
- Step 1: Shareholders (principals) appoint managers (agents) to run the company.
- Step 2: If managers act in their own interests, there is an agency problem.
- Step 3: Corporate governance seeks to reduce it.
Answer
The agency problem.
Why not the others: The free-rider problem: The free-rider problem is where people benefit from a shared good without contributing. The moral hazard of insurance: Moral hazard arises when someone is protected from risk and behaves differently. The tragedy of the commons: This concerns overuse of a shared resource.
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