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Imagine yourself in this situation: You take your car into the shop, where the mechanic tells you that you need a number of pricey repairs. Do you really need them

Imagine yourself in this situation:

You take your car into the shop, where the mechanic tells you that you need a number of pricey repairs. Do you really need them? How do you know if the mechanic is right, or even telling the truth?

What you’re experiencing is a principal-agent problem, which can arise when the incentives of both parties are not aligned.

You want your car to get fixed. The mechanic is looking to make money. And you don’t have the information to know a good deal from a bad deal.

Of course, this is just one example. But the principal-agent problem shows up other places, too — whenever there’s a case of asymmetric information. In other words, whenever one party has more and better information than the other.

Check out this video to learn more about this “problem.” Can you think of creative ways to address this?

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