Garment Factory Owner's Strategy for Success

How can a garment factory owner effectively reduce the principal-agent problem?

A. Increasing supervision of the workers

B. Paying the workers an hourly wage

C. Paying the workers for each garment produced

D. Reducing the number of breaks the workers take

The correct answer is A. increasing supervision of the workers.

The principal-agent problem refers to the conflict of interest between the owner or principal of a business and the employees or agents who work on behalf of the owner. In a garment factory, this problem can arise when the owner's goals and incentives do not align with the workers' incentives.

Increasing supervision of the workers can be an effective way to address the principal-agent problem. By closely monitoring and supervising the workers, the owner can ensure that they are following instructions, meeting quality standards, and working efficiently. This helps to reduce the likelihood of moral hazard or shirking by the workers.

Options B, C, and D involve different methods of payment, but they do not directly address the principal-agent problem. While hourly wages, piece-rate payments, or reducing breaks can influence worker behavior, they may not fully resolve the underlying conflicts of interest and information asymmetry between the owner and workers. Therefore, option A is the most effective choice as it directly tackles the principal-agent problem by increasing supervision and oversight of the workers.

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