Question

Before you bring your car to a mechanic, you read reviews of the mechanic on a service review website like Yelp, to ensure that she is trustworthy, honest, and competent. This is an example of what?

Answer 1

The correct answer is an institution helping to rectify a principal-agent problem

Principal-agent problem addresses the difficulties that can arise in conditions of asymmetric and incomplete information, when a principal hires an agent, such as the problem of potential conflict of interest and moral hazard, as the principal is presumably hiring the agent to pursue the principal's interests.

Various mechanisms can be used to try to align the interests of the agent with those of the principal, such as part payments, commissions, profit sharing, performance measurement (including financial statements), establishing an agent liaison or fear of dismissal.