Principal-Agent Model

The Principal-Agent Model describes a relationship where one party, the principal, hires another, the agent, to perform tasks on their behalf. The principal trusts the agent to act in their best interests, but the agent may have different motivations or information. This can lead to issues, such as the agent prioritizing personal gain over the principal's goals. To align their interests, principals often create incentives, oversight, or contracts to ensure the agent acts responsibly and effectively. This model is widely used in economics, business, and management to understand and address potential conflicts of interest.