Which concept explains how the principal can ensure that the agent acts in the principal's interest?

• A. Principal-Agent problem
• B. Tragedy of the commons
• C. Free-rider
• D. Confederation

Answer: (A)

This question tests the principal-agent problem, the situation where someone (the principal) delegates authority to someone else (the agent) who may have different goals or more information. Because the agent’s actions influence the principal’s outcomes, there’s a risk that the agent won’t act in the principal’s best interest. To fix this, you use tools that align incentives and improve oversight: monitoring and oversight to deter shirking, contracts and performance-based incentives to reward outcomes the principal wants, and transparent reporting to reduce information gaps. In government contexts, examples include audits, independent reviews, elections or term limits that create accountability, and funding tied to measurable results. The other concepts—tragedy of the commons (shared-resource overuse), free-rider (benefiting without paying), and confederation (a type of political structure with weak central authority)—do not address how to make an agent act in the principal’s interests.