Principal-Agent Relationships

A principal-agent relationship occurs when one person or entity (the principal) hires another (the agent) to perform tasks or make decisions on their behalf. This arrangement is common in business, where, for example, shareholders (principals) employ managers (agents) to run a company. The challenge arises because the agent may have different interests than the principal, leading to potential conflicts. To align these interests, principals often implement incentives or oversight mechanisms, ensuring that the agent acts in the principal's best interests while fulfilling their responsibilities effectively.