a) Explain what is meant by the term principal-agent problem. Give an example of a setting where this problem has arisen. Do you think that increased monitoring would have eliminated the problem? Why don't firms simply hire more supervisors to eliminate shirking problems?
b) Speculate on what actions workers might take to resolve a free-rider problem arising from a profit-sharing problem.
c) What are stock options? How do they relate to the principal-agent problem?