The principal-agent problem, often called the agency problem, describes the conflict of interest that arises when one party, the agent, acts on behalf of another party, the principal, and their interests and priorities do not fully align. The problem grows worse the greater the gap in interests and information between the two, and the less able the principal is to monitor or penalize the agent's actions; when an agent's actions deviate from what best serves the principal, the resulting loss is called agency cost. Common examples include company managers acting as agents for shareholders, elected officials acting as agents for citizens, and brokers acting as agents for the people who hire them. Principal-agent models typically focus on either moral hazard, where the agent's actions are hidden, or adverse selection, where the agent's information is hidden, and proposed remedies usually try to align incentives through compensation structures and performance measurement so agents are encouraged to act in the principal's interest. This description is adapted from Wikipedia contributors under CC BY-SA 4.0; changes were made. https://creativecommons.org/licenses/by-sa/4.0/
Facts
Disputed
Proposed ByDisputed: Stephen Ross and Barry Mitnick both claim authorship; the most-cited formal treatment is by Michael C. Jensen and William Meckling 1 The source states the theory emerged in the 1970s with disputed authorship between Stephen Ross and Barry Mitnick, while the most-cited formal treatment is by Michael C. Jensen and William Meckling; no single originating year is settled, so origin-year is left unfilled (recorded as a gap). FieldContract theory and organizational economics 1 SignificanceApplies wherever one party acts on behalf of another with misaligned interests and asymmetric information, including corporate management and shareholders, elected officials and citizens, and brokers and markets. 1 Classification
Concept Form Connections
Associated With
Standard framing treats adverse selection, a hidden-information problem, as one of the two canonical forms the principal-agent problem takes.
Source Wikipedia
Additional Source Principal-agent problem (Wikipedia)
Moral Hazard, Concepts Moral hazard, a hidden-action problem, is the other canonical form the principal-agent problem takes.
Source Wikipedia
Additional Source Principal-agent problem (Wikipedia)
Sources
1. Principal-agent problem (Wikipedia)
Lead section
The principal-agent problem (often abbreviated agency problem) refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the "principal").
Overview section
There is some contention as to who originated the theory, with theorists Stephen Ross and Barry Mitnick both claiming authorship.
Lead section, second paragraph
Common examples of this relationship include corporate management (agent) and shareholders (principal), elected officials (agent) and citizens (principal), or brokers (agent) and markets (buyers and sellers, principals).
lead paragraph, sentence beginning: The principal-agent problem (often abbreviated agency proble
The principal-agent problem (often abbreviated agency problem) refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the "principal").
- Associated With: Adverse Selection
- Associated With: Moral Hazard
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