In agency theory, a business's principal is typically a(n)
Blank
______.

Question

In agency theory, a business's principal is typically a(n) 
Blank
______.

BlackTom AI · Accepted Answer

Delving into the basics of agency theory helps clarify who the principal typically is in a business context.
Option 1: 'owner' — This aligns with the standard view in agency theory that the principal is the entity that owns the firm and delegates decisions to agents. The owner bears the residual risk and seeks to maximize firm value, making ownership the core characteristic of the principal role.
Option 2: 'employee' — While employees may act as agents on behalf of the owner, they are not the principal in the common formulation of agency theory. They are typically the agents who carry out tasks under direction, not the party to whom decisions are delegated.
Option 3: 'supplier' — A supplier provides inputs or services and may have a contractual relationship, but they do not normally function as the principal who delegates decision-making. This choice confuses external contracting relationships with the principal-agent dynamic inside the firm.
Option 4: 'manager' — Managers often act as agents representing the interests of the owners. In some contexts, managers could be viewed as principals in a separate governance layer, but in the classic agency theory framework, the principal is the owner who delegates to managers and others.

Taken together, the options contrast roles within the principal–agent framework, where the owner is the quintessential principal who delegates authority to agents like managers and employees, while suppliers are external parties and do not occupy the principal position.

In agency theory, a business's principal is typically a(n) Blank ______.

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