Exploring Agency Problems

The principal-agent problem, which is sometimes called the agency problem, is the potential conflict of interest when a person (the principal) has someone (the agent) acting on his behalf. If the agent is self-interested, and economics assumes that the agent will be, the agent may have incentives to act in ways that are not in the interest of the principal. In each of the following, explain why there is a potential conflict of interest and explain ways it can be overcome.

a) You are injured and you believe that negligence was a reason. You hire a lawyer to sue for damages.
b) You are selling your house and you hire a realtor to get you the best price possible.
c) You are a shareholder and you want the management of the company to maximize profit.
d) You are management and you want the workers to work as hard as they can.
e) You own an apple orchard and you hire migrant workers to pick your apples.
f) You are a homeowner and you hire someone to reroof your house.
g) You are a taxpayer and a parent and you want the public school teachers to teach your children as much as they can learn.
h) You are a citizen and you want your congressman to provide good government.
i) You have been charged with a crime and you want a lawyer who will work as hard as he or she can to get your a not-guilty verdict.
j. You are an athlete and you hire an agent to negotiate a contract for you.
k. Think of another example in which there might be an agency problem.

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