Agency costs

Agency costs refer to the expenses that arise from conflicts of interest between parties, primarily in a business context. Specifically, these costs occur when the interests of shareholders (owners) and managers (agents) diverge. For example, managers might prioritize their job security or personal perks over maximizing profits for shareholders. Consequently, these agency costs can include monitoring expenses to oversee manager behavior, performance-based incentives, or losses from decisions that don't align with shareholder interests. Essentially, agency costs represent the financial impact of managing these conflicting motivations within an organization.