Select all the correct alternatives regarding the Principal-Agent problem in corporations:

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BlackTom AI · Accepted Answer

Diving into the Principal-Agent problem in corporations, we can evaluate the ideas that typically appear as options in questions like this.
Option 1: 'It originates in the separation of ownership (shareholders) and control (managers) in a corporation.' This is a foundational characterization: shareholders (principals) own the firm but delegate daily decision-making to managers (agents), creating potential misalignment of interests and information asymmetry. The separation of ownership and control is the core structural source of the principal-agent dynamic, leading to incentives and monitoring challenges.
Option 2: 'The problem can be mitigated by making the manager's contract sensitive to the firm's performance (profits, stock price, etc.)' This reflects a standard mechanism for alignment: tying managerial compensation to firm outcomes aligns managers' incentives with shareholders' objectives. Performance-based pay, stock options, and profit-sharing are classic tools used to reduce moral hazard and opportunistic behavior by managers, as long as performance metrics are well-chosen and verifiable.
Considering the typical content about principal-agent theory, both statements capture essential aspects of the problem and its mitigation strategies. There are common nuances to consider, such as potential drawbacks of performance-sensitive contracts (risk-sharing, short-termism, gaming metrics), but in terms of the core ideas presented, each option identifies a valid element of the principal-agent framework.
If there were any additional options, we would assess them similarly by checking whether they describe the ownership-control split or credible, incentive-aligned contract designs. In this case, the two provided statements are consistent with standard explanations of the principal-agent problem in corporate contexts.

COMM_V 298 101 102 103 2025W1 Class 1 and 2 Practice Quiz

Select all the correct alternatives regarding the Principal-Agent problem in corporations:

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