By Yolanda Holmes
Navy performed limited background checks on Thompson and Salvatore Carabetta when project was granted. Shaw Group and Carabetta were feuding during project, company rejected warnings from whistle-blower John Jack, costs escalated and components of houses were downgraded without Navy approval. Navy couldn't get documentation out of American Eagle, Navy didn't act quickly on information from John Jack.
Principal-agent theory. In this time of ever more scarce government resources, the idea that one level of government can mandate the activities and therefore resource usage of another may seem counter-intuitive. …show more content…
However, sometime the relationship that exists between. The manager has information and expertise that the shareholders do not have-indeed, that is why they are the managers. The shareholder can observe profits, but hey can not directly observe the managers’ efforts. This is what happened when the Navy did not know that American Eagle had illegally overbilled. To complicate matters further, even when the managers' behavior can be observed, the shareholders do not generally have the expertise to evaluate it. Everyone can see the firm's revenues, but it takes very detailed knowledge to estimate how large those revenues could have been if the managers had acted differently. Boards of directors, who represent the firm's shareholders, can acquire some of the relevant expertise and monitor managerial behavior, but again this is costly. The key unifying features of principal-agent problems are that The principal knows less than the agent about something important, and their interest’s conflict in some way Feldman, Lobel (2010). Problems where agents can do some costly action to improve outcomes for the principal but the principal can’t observe the action. These are known as effort aversion/moral hazard problems. Problems where there are different types of agents and principals can’t tell the difference among them. These are known as adverse selection when the types are fixed and the question is which agents will