Explain the principal-agent problem


Directions: Be sure to make a copy of your answer before submitting it to Ashworth College for grading. Unless otherwise stated, answer in complete sentences, and be sure to use correct English spelling and grammar. Sources must be cited in APA format. Your response should be a minimum of one (1) single-spaced page to a maximum of two (2) pages in length.

Discuss each of the following in a complete paragraph.

1. Explain the principal-agent problem as it pertains to equity contracts.

2. Why does the free-rider problem occur in the debt market?

3. Your bank has the following balance sheet:

Assets Reserves$50 millionSecurities$50 millionLoans$150 million Liabilities Checkable deposits$200 millionBank capital$50 million If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?

4. How can specializing in lending help to reduce the adverse selection problem in lending?

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Finance Basics: Explain the principal-agent problem
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