The principal-agent problem

The principal-agent problem occurs when one person or entity (the "principal") hires another (the "agent") to act on their behalf, but their interests may not fully align. The agent might pursue personal goals instead of the principal’s best interests, especially if their incentives differ or if the principal can't perfectly monitor the agent’s actions. For example, a company's owners (principals) rely on managers (agents) to run the business effectively, but managers may prioritize personal gains or risk-taking that doesn't maximize the owners’ wealth. The challenge is designing contracts and oversight to ensure the agent's actions align with the principal’s goals.