Answer to Question #225858 in Finance for Anisha Kumar

Question

On what bases could you argue the collapse of HIH was an example of the principal-agent problem?

Answer 1

Principal-agent problem results from priority conflicts amongst a group or individual and the authorized representative acting on their behalf. An agent or trustee might act contrary to the interests of the principal.

The collapse of HIH company is attributed to reckless management, unsupervised authority delegation, reserve problems, underpricing, false reports, extensive and complex reinsurance arrangements, incompetence, greed, fraud, and self–dealing.

Following these claims, collapse of HIH company can be regarded as an example of principal-agent problem.