Principal-Agent Dilemma
A Principal-Agent Dilemma is an agent interaction dilemma (with incomplete and asymmetric information) when a principal agent decides to perform an agent representative hiring task.
- Context:
- It can (typically) involve structuring Incentives.
- See: Misalignment, Expectations Market, Moral Hazard, Conflict of Interest.
References
2011 =
- http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem
- QUOTE: In political science and economics, the principal–agent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent, such as the problem of potential moral hazard and conflict of interest, in as much as the principal is — presumably — hiring the agent to pursue the principal's interests.
Various mechanisms may be used to try to align the interests of the agent in solidarity with those of the principal, such as piece rates/commissions, profit sharing, efficiency wages, performance measurement (including financial statements), the agent posting a bond, or fear of firing.
The principal–agent problem is found in most employer/employee relationships, for example, when shareholders hire top executives of corporations. Political science has noted the problems inherent in the delegation of legislative authority to bureaucratic agencies.
As another example, the implementation of legislation (such as laws and executive directives) is open to bureaucratic interpretation, which creates opportunities and incentives for the bureaucrat-as-agent to deviate from the intentions or preferences of the legislators. Variance in the intensity of legislative oversight also serves to increase principal–agent problems in implementing legislative preferences.
- QUOTE: In political science and economics, the principal–agent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent, such as the problem of potential moral hazard and conflict of interest, in as much as the principal is — presumably — hiring the agent to pursue the principal's interests.
1976
- (Jensen & Meckling, 1976) ⇒ Michael C. Jensen, and William H. Meckling. (1976). “Theory of the Firm: Managerial behavior, agency costs and ownership structure.” In: Journal of Financial Economics, 3(4). doi:10.1016/0304-405X(76)90026-X
- QUOTE: This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.
"The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company." — Adam Smith (1776)
… Before moving on, however, it is worthwhile to point out the generality of the agency problem. The problem of inducing an “agent” to behave as if he were maximizing the “principal’s” welfare is quite general. It exists in all organizations and in all cooperative efforts — at every level of management in firms … We confine our attention in this paper to only a small part of this general problem — the analysis of agency costs generated by the contractual arrangements between the owners and top management of the corporation.
- QUOTE: This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.