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CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management

Mehta Textiles Ltd.'s managing director knows far more about the firm's day-to-day operations and true prospects than its shareholders do. This situation, which makes monitoring the manager difficult, is best described as:

This is information asymmetry. The managing director has better information about operations than shareholders, so shareholders cannot easily verify his effort or decisions. This imbalance is a central feature of the agency relationship and makes monitoring difficult and costly.

  1. AEconomies of scale
  2. BInformation asymmetryCorrect
  3. CPerfect competition
  4. DSpan of control

Explanation

When the agent holds more or better information than the principal, there is information asymmetry. It makes it hard for the principal to verify the agent's effort and decisions, which sustains the agency problem. Span of control concerns the number of subordinates, not information gaps.

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