Reference no: EM132987163

Agency theory is simply one way used to describe how people may behave in a corporate environment. By referring to this theory, rules and regulations can be constructed around this expected behavior to direct outcomes in a way that is likely to be beneficial for all concerned.

The board of Infinity Ltd is considering business proposals from two major suppliers who are competing for work:

• Prime Merchants Ltd offers the first proposal that would create significant economies of scale and Infinity Ltd will save almost $2 million every year. Further, Prime Merchants Ltd offered each of the directors of the board an "all expenses weekend away"; as well as a gift of $50,000 each if the proposal is accepted by Infinity Ltd.
• Galaxy Ltd offers the second proposal, it would not only save Infinity Ltd $2 million every year but it would also result in a guaranteed increase in revenue of $1 million. Besides that, there are no other significant differences between the two proposals.

Problem i. In terms of agency theory, which proposal will the agent accept and why?

Problem ii. Agency theory assumes that the agents are in a position of power since they have access to information and are in a position to make decisions. Justify how can the board of Infinity Ltd highlight this assumption.