The Agency Theory

The Agency Theory explains the relationship between two parties: the principal, who delegates tasks, and the agent, who performs them. This theory highlights the potential conflicts that arise when the agent's interests do not align with those of the principal. For example, in a company, shareholders (principals) hire executives (agents) to manage operations. The theory suggests that to minimize issues, principals must create incentives and monitoring systems to ensure agents act in the principals' best interests, ultimately aiming to enhance overall performance and trust within the relationship.