Principal-Agent Problems: A Comprehensive Guide for Public Economics Students

Question 1

In principal-agent relationships, what is a key consequence of information asymmetry?

Accepted Answer

Moral hazard and adverse selection

Answer

Enhanced collaboration and trust

Answer

Increased efficiency and effectiveness in decision-making

Question 2

In a principal-agent relationship, what type of information asymmetry can occur when one party has more information than the other?

Accepted Answer

Hidden information

Answer

Adverse selection

Answer

Moral hazard

Answer

Externalities

Question 3

Which of the following is a defining characteristic of a principal-agent relationship?

Accepted Answer

Information asymmetry can exist.

Answer

One party does not delegate tasks to another.

Answer

The agent's interests perfectly align with the principal's.

Answer

Both parties have perfect information.

Question 4

How can information asymmetry lead to inefficiencies in the public sector?

Accepted Answer

Agents may not act in the best interests of the principal due to hidden information or opportunistic behavior.

Answer

Information asymmetry promotes transparency and accountability.

Answer

Principals can easily monitor agents' actions and motivations.

Question 5

Which of the following is a potential solution to address principal-agent problems?

Accepted Answer

Creating performance-based incentives for agents.

Answer

Eliminating information asymmetry completely, which is unrealistic.

Answer

Reducing the number of public sector employees without addressing underlying issues.

Answer

Reliance on trust and goodwill alone, without implementing proper safeguards.

Question 6

In a principal-agent relationship, what does 'adverse selection' refer to?

Accepted Answer

Agents with hidden unfavorable characteristics misrepresenting themselves as more desirable.

Answer

Principals intentionally choosing agents who are less qualified.

Answer

Agents overestimating their abilities to impress principals.

Question 7

Which of the following is an example of a principal-agent problem in the public sector?

Accepted Answer

A government hiring a contractor to build a road, but the contractor cuts corners to save money.

Answer

A doctor prescribing medication to a patient, but the patient does not take it as advised.

Answer

A parent hiring a tutor for their child, but the tutor does not prioritize the child's education.

Question 8

How can information asymmetry be reduced in principal-agent relationships?

Accepted Answer

By increasing transparency and accountability.

Answer

By eliminating all potential conflicts of interest, which can be unrealistic.

Answer

By reducing the number of agents involved, which may not be feasible.

Answer

By relying solely on trust and reputation, without implementing proper safeguards.

Question 9

What is a potential consequence of moral hazard in principal-agent relationships?

Accepted Answer

Agents may take excessive risks or engage in unethical behavior.

Answer

Principals will always be able to detect and punish agents' misconduct.

Answer

Agents may become overly cautious and avoid taking any risks at all.

Question 10

How can reputation and social norms influence the behavior of agents in principal-agent relationships?

Accepted Answer

Agents may be less likely to engage in opportunistic behavior if they value their reputation.

Answer

Agents will always prioritize their own self-interest over reputation.

Answer

Reputation and social norms have no impact on agents' behavior.

Question 11

In a principal-agent relationship, what is the role of monitoring?

Accepted Answer

To reduce information asymmetry and discourage opportunistic behavior.

Answer

To eliminate the need for trust and communication altogether.

Answer

To guarantee that agents always act in the best interests of principals, which is not realistic.

Question 12

How can technology impact principal-agent problems?

Accepted Answer

Technology can facilitate monitoring, reduce information asymmetry, and automate certain tasks.

Answer

Technology has no influence on principal-agent problems.

Answer

Technology can only worsen principal-agent problems.

Question 13

Which of the following is a defining characteristic of a principal-agent problem where one party acts on behalf of another?

Accepted Answer

Information asymmetry

Answer

Aligned incentives

Answer

Perfect monitoring

Answer

Complete contracts

Question 14

In the context of public economics, who typically assumes the role of the principal, delegating tasks to others?

Accepted Answer

Government

Answer

Private firms

Answer

Individuals

Answer

Non-profit organizations

Question 15

Which of the following is a potential negative consequence of information asymmetry in a principal-agent relationship?

Accepted Answer

Agent shirking

Answer

Perfect outcome

Answer

Agent overexertion

Answer

Principal overspending

Question 16

Which mechanism can help mitigate information asymmetry and improve the efficiency of a principal-agent relationship?

Accepted Answer

Monitoring

Answer

Bribery

Answer

Luck

Answer

Trust

Question 17

Which of the following is a limitation of monitoring as a mechanism to reduce information asymmetry in principal-agent problems?

Accepted Answer

It can involve significant costs to implement

Answer

It completely eliminates information asymmetry

Answer

It is always effective in motivating agents

Question 18

In the context of principal-agent problems, what is the primary purpose of contracts?

Accepted Answer

To outline the terms and expectations of the relationship between the principal and the agent

Answer

To guarantee perfect outcomes

Answer

To eliminate information asymmetry

Question 19

Which of the following is NOT a potential consequence of a principal-agent problem in the public sector?

Accepted Answer

Increased economic growth

Answer

Reduced public service quality

Answer

Lower tax revenues

Answer

Increased government spending

Question 20

Which of the following is an example of a principal-agent problem occurring in the private sector?

Accepted Answer

A company manager employing and managing staff

Answer

A doctor treating a patient

Answer

A government regulating a monopoly

Answer

A teacher instructing students

Question 21

Which of the following is a factor that can contribute to information asymmetry in principal-agent problems?

Accepted Answer

The complexity of the task being delegated

Answer

Shared goals

Answer

Equal access to information

Answer

Trust between the parties

Question 22

Which of the following is a defining characteristic of a principal-agent problem?

Accepted Answer

Information asymmetry

Answer

Absence of incentives

Answer

Lack of competition

Answer

High transaction costs

Question 23

In a typical principal-agent relationship, which party possesses more information?

Accepted Answer

The agent

Answer

The principal

Answer

Neither party has more information

Question 24

What is typically the primary motivation of an agent in a principal-agent relationship?

Accepted Answer

Pursuit of self-interest

Answer

Alignment with the principal's interests

Answer

Maximization of social welfare

Answer

Strict adherence to rules and regulations

Question 25

Which of the following is NOT a potential consequence of principal-agent problems?

Accepted Answer

Increased efficiency and productivity

Answer

Rent-seeking behavior

Answer

Moral hazard

Answer

Adverse selection

Question 26

In a principal-agent relationship, who generally bears the financial risk of the agent's actions?

Accepted Answer

The principal

Answer

The agent

Answer

Both parties share the risk equally

Answer

Neither party bears the risk

Question 27

Which of the following is an example of a principal-agent problem in the public sector?

Accepted Answer

Relationship between a government agency and a contractor

Answer

Relationship between a landlord and a tenant

Answer

Relationship between a doctor and a patient

Answer

Relationship between an employer and an employee

Question 28

What is a primary purpose of a contract in addressing principal-agent problems?

Accepted Answer

To align the incentives of the principal and the agent

Answer

To reduce information asymmetry

Answer

To guarantee compliance

Answer

To eliminate risk

Question 29

Which of the following factors can contribute to more severe principal-agent problems?

Accepted Answer

Complexity of tasks and activities

Answer

Low transaction costs

Answer

Clear and effective communication

Answer

High levels of trust between the parties

Question 30

In a principal-agent relationship, what is the term for actions taken by the agent that are not in line with the principal's interests?

Accepted Answer

Moral hazard

Answer

Information asymmetry

Answer

Adverse selection

Answer

Rent-seeking

Question 31

In a principal-agent relationship, the agent has an informational advantage over the principal. This phenomenon is known as:

Accepted Answer

Asymmetric information

Answer

Adverse selection

Answer

Moral hazard

Answer

Rent-seeking

Question 32

Which of the following is a potential solution to mitigate principal-agent problems?

Accepted Answer

Performance-based pay

Answer

Fixed contracts

Answer

Government ownership

Answer

Elimination of the public sector

Question 33

In a public-private partnership, the principal is typically the:

Accepted Answer

Government

Answer

Employees

Answer

Taxpayers

Answer

Private company

Question 34

Which of the following is a characteristic of an effective principal in a principal-agent relationship?

Accepted Answer

Effective communication

Answer

Short-term focus

Answer

Lack of trust

Answer

Autocratic behaviour

Question 35

Which of the following is an example of a principal-agent problem in the context of education?

Accepted Answer

Teachers may not exert sufficient effort if their salaries are not linked to student outcomes.

Answer

Parents may not provide adequate support for their children's education.

Answer

Students may not study diligently if they lack motivation.

Question 36

In a principal-agent relationship, the principal's overarching goal is to:

Accepted Answer

Maximize utility

Answer

Minimize costs

Answer

Reduce risk

Answer

Increase revenue

Question 37

Which of the following is a key characteristic of a principal-agent relationship?

Accepted Answer

Asymmetric information

Answer

Perfect competition

Answer

No hidden actions

Answer

Equal bargaining power

Question 38

In a principal-agent problem, what is shirking?

Accepted Answer

When an agent does not put in the effort expected by the principal.

Answer

When the agent is dishonest with the principal.

Answer

When the agent earns more than the principal.

Answer

When the principal does not provide enough information to the agent.

Question 39

Which of the following is a potential measure to address information asymmetry in principal-agent relationships?

Accepted Answer

Establishing clear performance targets and monitoring agent performance.

Answer

Imposing price controls on the goods or services provided by the agent.

Answer

Providing subsidies to the agent to encourage desired behavior.

Answer

Nationalizing the industry in which the principal and agent operate.

Question 40

How can moral hazard affect principal-agent relationships?

Accepted Answer

Agents may take excessive risks because they know the principal will bear the consequences.

Answer

Agents always act in the best interests of principals, even if it means taking risks.

Answer

Improved communication between parties eliminates moral hazard.

Answer

Principals become too risk-averse, leading to missed opportunities.

Question 41

In the public sector, how can adverse selection impact principal-agent relationships?

Accepted Answer

Less qualified candidates may be hired for public sector positions due to a lack of information about their true abilities.

Answer

Taxpayers benefit from lower costs due to reduced hiring expenses.

Answer

Efficiency in service provision improves because only the most qualified candidates are hired.

Answer

Public trust in government institutions increases.

Question 42

Which of the following is a potential solution to address adverse selection?

Accepted Answer

Screening job candidates through interviews, tests, or background checks to assess their qualifications.

Answer

Implementing central planning to dictate which candidates are hired for public sector positions.

Answer

Imposing price ceilings on goods or services to prevent unqualified providers from entering the market.

Answer

Nationalizing industries to eliminate competition and ensure only qualified providers are available.

Question 43

How can reputation mechanisms help mitigate principal-agent problems?

Accepted Answer

Reputation mechanisms incentivize agents to maintain a positive reputation by rewarding good behavior and punishing bad behavior.

Answer

Reputation mechanisms guarantee perfect competition in the market.

Answer

Reputation mechanisms completely eliminate information asymmetry between principals and agents.

Question 44

What is a limitation of reputation mechanisms?

Accepted Answer

Reputation mechanisms may be less effective when agents have short time horizons and are not concerned with building a long-term reputation.

Answer

Reputation mechanisms guarantee perfect information between principals and agents.

Answer

Reputation mechanisms are always enforceable and cannot be undermined.

Question 45

How can technology potentially impact principal-agent relationships?

Accepted Answer

Technology can reduce information asymmetry by providing more data and transparency about agent behavior.

Answer

Technology can completely eliminate moral hazard by making it impossible for agents to take excessive risks.

Answer

Technology guarantees perfect competition in the market, eliminating principal-agent problems.

Answer

Technology makes reputation mechanisms obsolete, as agents can easily manipulate their online reputations.

Question 46

In a principal-agent problem, which of the following is a typical example?

Accepted Answer

A CEO assigning investment decisions to a fund manager

Answer

A parent establishing rules for their child's behavior

Answer

A government enacting laws that businesses must comply with

Question 47

Which of the following is a potential effect of principal-agent problems in the public sector?

Accepted Answer

Inefficient allocation of resources

Answer

Lower tax revenues

Answer

Political instability

Answer

Increased government expenditures

Question 48

Which of the following is a potential limitation of performance-based incentives?

Accepted Answer

Difficulty in accurately measuring performance

Answer

High implementation costs

Answer

Unforeseen consequences

Answer

Lack of employee motivation

Question 49

In a principal-agent relationship, which party generally possesses the greater information advantage?

Accepted Answer

The agent

Answer

Both parties have equal information

Answer

Neither party has an information advantage

Answer

The principal

Question 50

Which of the following is a potential solution to address the problem of moral hazard?

Accepted Answer

Monitoring and enforcement

Answer

Reducing the agent's autonomy

Answer

Increasing the agent's salary