. Suppose that you are hired as a consultant to a large retail chain of apparel stores. As the company has grown, the CEO (also the owner) and the stock analysts who follow the company have noticed that the newly opened stores are not meeting sales projections. The CEO wants you to find out what is causing this problem and fix it. You do investigation and learn that the business development managers in the company are responsible for finding new store locations and negotiating leases with property owners. The company rewards the business development managers with stock options, provided that they open 5 new stores in a single year. Each new store is expected to have potential sales of at least $2 million per year. However those newly open stores can only achieve half of this amount. As a consultant, you are required to answer following questions.

a. (4 marks) Describe the principal-agent relationship. Who is making the bad decisions? Explain.

b. (4 marks) Do the agents have enough information to make a good decision? Explain.

c. (4 marks) Do the agents have incentives to make a good decision? Explain.

d. (10 marks) Based on your answers to (a), (b) and (c), discuss the centralization and decentralization solutions to resolve the principle-agent conflicts.

e. (3 marks) Based on your answer to (d), what solution will you propose. Justify your choice.