Scribd
Upload
15 views1 page

Micro

The principal-agent problem occurs when a principal delegates control over an asset to an agent who may act in a way that is contrary to the principal's best interests. It was developed in the 1970s and outlines how separation of ownership and control can lead to agency costs. Remedies involve clarifying expectations and monitoring results, with the principal typically responsible for correcting any issues.

Uploaded by

Navin Raghav Anand
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
15 views1 page

Micro

The principal-agent problem occurs when a principal delegates control over an asset to an agent who may act in a way that is contrary to the principal's best interests. It was developed in the 1970s and outlines how separation of ownership and control can lead to agency costs. Remedies involve clarifying expectations and monitoring results, with the principal typically responsible for correcting any issues.

Uploaded by

Navin Raghav Anand
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 1

The principal-agent problem is a conflict in priorities between a person or group and the

representative authorized to act on their behalf. An agent may act in a way that is contrary to
the best interests of the principal. The principal-agent problem is as varied as the possible
roles of principal and agent. It can occur in any situation in which the ownership of an asset,
or a principal, delegates direct control over that asset to another party, or agent. The
principal-agent problem has become a standard factor in political science and economics. The
theory was developed in the 1970s by Michael Jensen of Harvard Business School and
William Meckling of the University of Rochester. In a paper published in 1976, they outlined
a theory of an ownership structure designed to avoid what they defined as agency cost and its
cause, which they identified as the separation of ownership and control.

This separation of control occurs when a principal hires an agent. The principal delegates a
degree of control and the right to make decisions to the agent. But the principal retains
ownership of the assets and the liability for any losses.

For example, a company's stock investors, as part-owners, are principals who rely on the
company's chief executive officer (CEO) as their agent to carry out a strategy in their best
interests. That is, they want the stock to increase in price or pay a dividend, or both. If the
CEO opts instead to plow all the profits into expansion or pay big bonuses to managers, the
principals may feel they have been let down by their agent.

There are a number of remedies for the principal-agent problem, and many of them involve
clarifying expectations and monitoring results. The principal is generally the only party who
can or will correct the problem.

You might also like