What is the primary focus of Agency Theory?
a) Aligning goals between employees and customers
b) Resolving conflicts between principals and agents
c) Enhancing organizational culture
d) Improving production efficiency
Answer: b) Resolving conflicts between principals and agents

Who are the “principals” in Agency Theory?
a) Managers
b) Employees
c) Shareholders or owners
d) Customers
Answer: c) Shareholders or owners

Who are the “agents” in the context of Agency Theory?
a) Customers
b) Employees
c) Managers
d) Suppliers
Answer: c) Managers

What is the key assumption about agents in Agency Theory?
a) Agents always act in the principal’s best interest
b) Agents may act in their own self-interest
c) Agents lack decision-making power
d) Agents and principals have identical goals
Answer: b) Agents may act in their own self-interest

Which problem arises when agents pursue their own interests over those of the principals?
a) Coordination problem
b) Agency problem
c) Communication breakdown
d) Organizational inefficiency
Answer: b) Agency problem

How can agency problems be mitigated?
a) By increasing employee autonomy
b) Through monitoring and incentives
c) By reducing organizational hierarchy
d) Through eliminating agents
Answer: b) Through monitoring and incentives

What is “moral hazard” in Agency Theory?
a) When agents act ethically in all situations
b) When agents take risks because they do not bear the full consequences
c) When principals over-monitor agents
d) When agents refuse to act on behalf of principals
Answer: b) When agents take risks because they do not bear the full consequences

What is “adverse selection” in Agency Theory?
a) Selecting agents based on their potential
b) A situation where agents withhold critical information
c) A problem arising from excessive monitoring
d) Aligning agent and principal goals
Answer: b) A situation where agents withhold critical information

Which of the following is an example of aligning agent and principal goals?
a) Reducing workload for agents
b) Offering performance-based incentives
c) Increasing monitoring costs
d) Eliminating bonuses for agents
Answer: b) Offering performance-based incentives

Which theory often complements Agency Theory in understanding organizational dynamics?
a) Transaction Cost Theory
b) Stakeholder Theory
c) Resource Dependence Theory
d) Behavioral Theory
Answer: a) Transaction Cost Theory

In Agency Theory, “monitoring costs” refer to:
a) Costs of agent training
b) Costs incurred to oversee agent behavior
c) Costs of organizational expansion
d) Costs of product development
Answer: b) Costs incurred to oversee agent behavior

What are “bonding costs” in Agency Theory?
a) Costs incurred by principals to align agent interests
b) Costs of acquiring new customers
c) Costs of restructuring the organization
d) Costs of legal compliance
Answer: a) Costs incurred by principals to align agent interests

Which type of contract is typically used to address agency problems?
a) Fixed salary contracts
b) Performance-based contracts
c) Open-ended contracts
d) Verbal agreements
Answer: b) Performance-based contracts

What is the “principal-agent relationship”?
a) A partnership between two organizations
b) A relationship where one party delegates work to another
c) A collaboration between stakeholders
d) A merger between two companies
Answer: b) A relationship where one party delegates work to another

Which of the following is a criticism of Agency Theory?
a) Overemphasis on organizational culture
b) Neglect of trust and social relationships
c) Focus on reducing transaction costs
d) Lack of application in real-world scenarios
Answer: b) Neglect of trust and social relationships

What does Agency Theory assume about information?
a) Information is always complete and accurate
b) Information asymmetry exists between principals and agents
c) Principals have no access to relevant information
d) Agents share all critical information
Answer: b) Information asymmetry exists between principals and agents

Which of the following is a consequence of unresolved agency problems?
a) Enhanced trust between principals and agents
b) Reduced organizational costs
c) Decline in organizational performance
d) Elimination of monitoring costs
Answer: c) Decline in organizational performance

What role does governance play in Agency Theory?
a) Eliminates agent autonomy
b) Reduces moral hazard and adverse selection
c) Increases the workload of principals
d) Eliminates the need for monitoring
Answer: b) Reduces moral hazard and adverse selection

What is the “free-rider problem” in Agency Theory?
a) Agents overperform to gain incentives
b) Principals avoid bearing costs of monitoring
c) Agents benefit from efforts of others without contributing equally
d) Agents demand higher salaries without performance guarantees
Answer: c) Agents benefit from efforts of others without contributing equally

Why are equity-based incentives effective in Agency Theory?
a) They reduce production costs
b) They align agents’ financial interests with principals’ goals
c) They eliminate the need for contracts
d) They provide autonomy to agents
Answer: b) They align agents’ financial interests with principals’ goals

Which of the following is an example of an agency cost?
a) Training costs
b) Monitoring expenses
c) Advertising costs
d) Product development costs
Answer: b) Monitoring expenses

What does “goal incongruence” mean in Agency Theory?
a) Agents and principals have identical objectives
b) Goals of agents and principals may conflict
c) Goals are always aligned by default
d) Agents have no decision-making authority
Answer: b) Goals of agents and principals may conflict

How does performance appraisal help in resolving agency problems?
a) By reducing costs
b) By ensuring goal alignment
c) By increasing agent autonomy
d) By eliminating information asymmetry
Answer: b) By ensuring goal alignment

What is a limitation of performance-based incentives?
a) They always lead to higher costs
b) They may encourage short-term behavior over long-term goals
c) They eliminate the need for monitoring
d) They reduce agent accountability
Answer: b) They may encourage short-term behavior over long-term goals

Which governance mechanism is commonly used to reduce agency problems?
a) Increasing autonomy for agents
b) Appointing independent boards
c) Eliminating all performance metrics
d) Adopting informal agreements
Answer: b) Appointing independent boards

Which scenario represents “hidden action” in Agency Theory?
a) Agents disclose all their decisions
b) Agents’ actions cannot be fully observed by principals
c) Principals over-monitor agents
d) Agents act against their self-interest
Answer: b) Agents’ actions cannot be fully observed by principals

What is the primary purpose of monitoring in Agency Theory?
a) To reduce operational costs
b) To ensure agents act in the principal’s best interest
c) To eliminate all risks
d) To provide autonomy to agents
Answer: b) To ensure agents act in the principal’s best interest