Managerial Economics:
The California Earthquake Authority at one time used outside claim adjusters. The claim adjusters received 9% of each approved claim. Why did this cause a principal-agent problem?
Which of these is the correct answer?
- Claim adjusters were not hired directly, so their goals were different that the Earthquake Authority's goals.
- Claim adjusters had incentive to approve any claim, while the earthquake authority needed them to reject suspect claims.