The California Earthquake Authority at one time used outside claim adjusters. Th

Question

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?

A: claim adjusters were not hired directly, so their goals were different that the earthquake authority's goals

B: the outside claim adjusters were both principals and agents

C: claim adjusters had incentive to approve any claim, while the earthquake authority needed them to reject suspect claims

D: the 9% share was too small to retain the claim adjusters

Explanation / Answer

Ans: C: claim adjusters had incentive to approve any claim, while the earthquake authority needed them to reject suspect claims

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