CAIE A-Level Economics 7.7.5 Principal-Agent Problem

Practise identifying conflicts when managers or other agents act for owners and evaluating how hidden actions, different objectives, contracts, monitoring and incentives affect…

Exam points

identify the principal, agent and conflicting objective before labelling the problem
link separation of ownership and control to growth, perks or lower profit and efficiency
evaluate monitoring, profit-linked pay, share ownership and contracts as alignment mechanisms

[Maximum number: 1]

What is likely to lead to the principal-agent problem?

a manager of a business makes decisions on behalf of the owner

music festival tickets are purchased by a person who intends to sell them at a large profit

the government is the only buyer of a pharmaceutical product

there is only one firm that manufactures the product

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7.7.5—Principal-agent problem question 1