Agency costs arise when which of the following occurs?

Agency costs refer to the costs associated with resolving conflicts and aligning interests between parties, typically in a principal-agent relationship. In this context, the principal is usually the owner or shareholder of a company, while the agent is the manager or employee working on behalf of the principal.

When principals and agents have differing goals, it creates a situation where the agent may act in their own self-interest rather than in the best interest of the principal. This misalignment of objectives can lead to inefficiencies and increased costs, as the principal must spend resources to monitor the agent’s performance or compensate for the agent's self-serving behavior. These costs can manifest in various ways, such as increased monitoring expenses, incentive schemes, or potential losses from poor decision-making by the agent.

The other options depict scenarios that do not inherently lead to agency costs. For example, employee collaboration on projects typically fosters teamwork and shared objectives, which helps align interests rather than create divergence. Additionally, investing in employee training generally aims to enhance skills and knowledge, benefiting both the employees and the organization, again promoting shared goals rather than conflict. Finally, when reward systems are aligned with business objectives, they serve to synchronize the interests of the agents with those of the principals, reducing agency costs rather than creating