CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management
In agency theory, the sum of monitoring expenditures by the principal, bonding expenditures by the agent and the residual loss is commonly called:
The total of monitoring expenditures, bonding expenditures and residual loss arising when owners hire managers to act for them is called agency cost. It measures the price of the conflict of interest between principal and agent, unlike opportunity, transaction or sunk costs.
- AAgency costCorrect
- BOpportunity cost
- CTransaction cost
- DSunk cost
Explanation
Jensen and Meckling define agency cost as monitoring costs plus bonding costs plus residual loss arising from the separation of ownership and control. Opportunity cost, transaction cost and sunk cost are different concepts and do not refer to this total.
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