principal-agent theory
Principal-agent theory examines the relationship between a principal (who delegates tasks) and an agent (who performs those tasks). It highlights potential conflicts of interest that arise when the agent doesn’t act in the best interest of the principal, often because their goals or incentives differ. For example, a company (principal) might hire a manager (agent) to run operations, but the manager might prioritize personal gains over the company's profits. This theory explores how to align interests through contracts, incentives, and monitoring to ensure the agent acts in a way that benefits the principal.
Additional Insights
-
Principal-Agent Theory is a concept in economics and management that explores the relationship between two parties: the principal, who delegates work or decisions, and the agent, who acts on behalf of the principal. The theory examines how to align the interests of the agent with those of the principal, since agents may have different goals and may not always act in the principal's best interest. This situation often creates challenges, such as issues of trust, motivation, and potential conflicts of interest, requiring effective management strategies to ensure that both parties work together effectively.