Question

Recall the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar​ restaurant, but your parents paid the bill. Did you order more food​ (or more expensive​ food) when your parents​ paid? Explain how this relates to the agency problem in corporations.
(Select all the choices that apply.)
A. In both situations there may be a lack of interest in controlling costs if those costs are not borne directly by the person making the decision.
B. Your situation could never lead to an agency problem since your parents would only want the best for you.
C. While you may be faced with an agency problem (spending more when your parents are buying than you would if you were paying), corporate managers are seldom faced with such decisions.
D. The agency problem leads an individual (in your case) and corporate managers (in the corporate setting) to put their own self-interest ahead of the interests of the shareholders (your parents in your case).

Answer 1

Answer: The options that apply are "A. In both situations there may be a lack of interest in controlling costs if those costs are not borne directly by the person making the decision." and "D. The agency problem leads an individual (in your case) and corporate managers (in the corporate setting) to put their own self-interest ahead of the interests of the shareholders (your parents in your case)."

Explanation: The agency theory has 2 parts an Individual (manager) who manages the company but does not own.

And a principal (owners or shareholders) who provide the capital.

The main problem is that there is a conflict of interest between them.