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NEED ANSWER ASAP / ANSWER NEVER USED BEFORE Do some research and find some historical or...

NEED ANSWER ASAP / ANSWER NEVER USED BEFORE

Do some research and find some historical or current real-life examples of agency problems. How could you prevent theses problems in the future? What else would you advise? You may provide examples of agency problems from your own experience. If you do that, be careful to provide enough anonymity so that you won't get in trouble.

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Let us first describe the agency problem, The Agency problem is a situation which arises when there is difference in interest between the principal and agent, or shareholder and managers managing the firm, A principal hires a agent to work or represent them in the interest which is best for the corporation of principal, but agent does not work in the interest which is best for the corporation or principal rather he works on his agenda or interest which is not the best for the corporation.

Real life example of the classical case of Enron where in the audit firm managers from Arthur Andersen agreed to Enron management and kept reporting the false financials of the company and kept the share pricing going up, so that they could get the good bonuses and paid well, but eventually things came in light and entire world know their malpractice and poor intentions.

How to avoid these agency problems:

The best way to avoid such problems in future is having strong governance and monitoring practice in place. Contractual incentives technique is also one of the very powerful tool to restrict the agency problem. Hence, we found that the right incentive and contract design can work well to avoid such situations.

The advice which I would like to give if principals finds the conflict in interest then they should try to change incentives to re-direct the interest towards principals favour, e.g.. Sales quotas based incentive will help in people putting more effort in selling more and trying to put more effort in reaching out more number of customers. The Principle- Agent model can also be deployed by designing the contracts which are more efficient in rewarding for the interest which is in favour of the principle.

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