Suppose you hired Janet, a real-estate agent, to help sell your house at the bes

Question

Suppose you hired Janet, a real-estate agent, to help sell your house at the best possible price. As compensation, Janet will receive 3% of the selling price. Suppose Janet can sell the house in a few days by putting it on the market at $240,000, or she can advertise it for $260,000 and, after negotiating with prospective buyers, sell it for $250,000. The process of negotiation will take two weeks.

If Janet chooses the $260,000 option, you gain an additional $10,000, while Janet’s gain would be relatively small. If the house sells for $240,000, Janet receives . And if the house sells for $250,000, she gets . An extra $300 for the additional effort to attract the most suitable buyer appears to be a fairly weak incentive for Janet, considering that she could have moved on to the next commission rather than putting time and energy into selling your house. This is an example of ( the principal-agent problem, discount from residual claims, proprietorship, an explicit cost)

Explanation / Answer

Principal agent problem arises from separation of ownership and the executor. If owner himself is the executor then o sucvh problem will arise. In pricipal agent problem, objective of owner is different from the objective of agent. So agent will execute the work in a manner to maximize his own interest. Off course he will try to maitaiin a reasonable level of profit to satisfy the owner. But in o circumstances he will maximize the profit.

Here Janet has bee hired by you to sale your real estate property. If Ganet can sell a property at higher price, then you as a principal will be the gainer. Your objective will be to maximize sell of real estate value. But Janet is getting commission. He will try to get a revenue where his commission is highest.

Here he ca fetch three prices. First one is $240,000 if sold now. If it is advertised for few days it will be sold at $250,000 . Thus as a principal you will gain $10,000. But Janet will earn only 3% of this extra $10,000 as extra commission i.e. $300. It is very low in comparison with his effort. So he will prefer to sell at $240,000. Thus your $10,000 extra earning opportunity will be lost.

Answer: This problem is a proncipal agent problem.

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