Question

What do economists call the situation where a hired manager does not have the same interests as the owners of the business?

Answer 1

When a hired manager does not have the same interests as the owners of the business, economists call it a principal-agent problem.

A principal-agent problem occurs when there is a conflict of interest between the owner(s) of the asset and the hired representative. This happens when a degree of control and decision-making is delegated to the hired individual. The risk that they will make decisions that are contrary to the owner’s best interest is called agency costs and is carried by the owner. It is the owners' responsibility to provide incentives for the hired manager or individual to act in favor of their same interests.

While the options are incorrect because:

1. Conquest and control: A hired manager is only delegated partial control and limited decision-making. Which can affect the interests of the owner but has neither the ownership of the asset nor carries the liability of loss and profit.
2. A financial problem: Financial problems refer to monetary problems including, excess debt, lack of savings, struggles with daily living, and bad spending habits.
3. A financial intermediary problems: A financial intermediary is a third party hired to manage and conduct financial transactions between two parties and are legally obliged to follow certain policies and guidelines.

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