Suppose you work for a business that runs a fleet of cars the sales personnel use. The fleet consists of 30 Toyota Camry sedans. All the expenses (insurance, registration, fuel, maintenance, and repairs) are paid by the firm. You have determined that it is cost-effective (from a tax and operations cost viewpoint) to “roll the fleet over” every 3 years. You plan to auction the cars.

a. Are there any agency costs (incentive problems) with the arrangement that the firm pays all the costs of operating the cars?

b. Are there any agency costs with selling the cars?

c. How might you mitigate the problems in parts (a) and (b)? Outline any new problems your suggestions might create.