Answer :

Final answer:

The car rental must typically be arranged through a car rental company, and such companies use outcome-based incentives, like making renters pay for damages, to ensure careful use of their vehicles. GPS tracking is increasingly used for better monitoring.

Explanation:

In the context of agency theory, the rental of a vehicle typically must be arranged through a car rental company. When you rent a car, an agency relationship is established where the renter (agent) needs to be incentivized to treat the rented vehicle with care. However, instead of direct monitoring, which can be costly and impractical, companies often rely on outcome-based incentives. For example, if damage occurs to the car, the driver may be responsible for the costs. While this enforces some level of care, it's not perfect because it also imposes a risk on drivers, as not all who damage a vehicle are penalized, and some drivers face penalties for issues not of their making. Advances in technology, such as GPS tracking, are enhancing the company's ability to monitor the behavior of renters without being overly intrusive.

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