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Politics requires collective action on the part of citizens to hold their representatives accountable (i.e. to...

  1. Politics requires collective action on the part of citizens to hold their representatives accountable (i.e. to address principal-agent problems). Why is collective action required in this context? Explain why collective action is difficult to achieve and describe two possible solutions and related examples in the context holding representatives accountable for their actions.

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Answer #1

The shareholders jointly own the corporation.

The process in which the owners take decisions and the financial managers of the company act on behalf of the owners in order to create wealth for the shareholders describes the way in which the owners control the firm’s management.

Agency relationship exists because the financial managers are the agents of the shareholders and the shareholders or owners are the principal. Hence there is a principal -agent relationship between the financial managers and the shareholders.

There can be a problem when the financial managers of the corporation act for their own benefit rather than the benefit of the shareholders. There may be project that may not be profitable for the shareholders, but the financial managers may want o pursue it for for getting a pay raise. So this can cause a conflict in the agent-principal relationship.

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