Unit 6.10

Question 1

What is the principal agent problem

Answer 1

Principal hire agent to act on their behalf but agents interests are not necessarily aligned with principals interests

Question 2

Describe a strategic interaction between agent and principal

Answer 2

Agent makes choice from possible actions available to them

Principal wants agent to choose one particular type of action in the principals best interest

Agent unlikely to work hard as it is costly or unpleasant

Question 3

What is an incomplete contract

Answer 3

Impossible to include all expectations

Question 4

What are 5 reasons for incomplete contracts

Answer 4

Information is not verifiable
Time and uncertainty
Measurement
Absence of judiciary
Preferences

Question 5

What is unverifiable info

Answer 5

Relevant info must be observable and verifiable for both parties

Question 6

Explain time and uncertainty

Answer 6

Generally executed over a period of time

Trying to predict all future events is unrealistic and not cost expensive

Question 7

Explain measurement

Answer 7

Many goods/services are difficult to measure or describe precisely enough

If difficult I’ve not included in contract

Question 8

Explain absence of a judiciary

Answer 8

For some transactions no third parties enforcing contract

Means incomplete

Question 9

Explain preferences

Answer 9

Sometimes less complete contract is preferred

Builds trust as you don’t have to monitor employees