Agency costs

The loss of efficiency in a principal-agent relationship, expressed as an amount of money, is called the agency cost. In many situations two people cooperate, with one assigning a task to the other and offering an amount of money in return. A representative example is the delegation.

In reality it must be assumed that one party (client, principal) can neither observe all actions, nor the efforts or qualifications of the other party (contractor, agent) free of charge. The agent therefore has a latitude in behavior that the principal cannot overlook. This room for maneuver is discretionary. The agent could fill this leeway in a selfish manner, and the selfish behavior of the agent could be at least in part to the detriment of the principal. Mankind has developed various solutions for such situations.
1. One provides, for example, that the role of agent is only assumed by persons of exemplary character, whose ethics and selflessness prevent them, as it were, from secretly following egoism.

2. In other cases, the controls and reports are so intensified that the agent no longer has any discretionary room for maneuver, but that all decisions, measures and actions of the agent can ultimately be observed beyond doubt.

3. A third solution pattern consists in offering the agent a specially structured fee so that the agent behaves in a way that is in harmony with the interests of the principal in its own interest, now taking into account the fee structure. This solution is known for short as "profit sharing" and it is at the fore of agency theory.

Agency theory does not advocate delegating tasks only to selfless, ethically exemplary personalities. Because this first way of solving agency problems is expensive in the sense that people of this character are rare.

The agency theory also does not advocate completely dismantling the agent's discretionary room for maneuver through controls, audits and an expansion of reporting, precisely because this would result in costs. These costs include, for example, the disadvantage an agent experiences if he is not "fully trusted" and verifications are carried out - a disadvantage which in turn would have to be compensated for in the cooperative relationship between the principal and the agent.
Offensichtlich ist die Motivation, etwa durch eine Ergebnisbeteiligung des Agenten, nicht gratis. Welcher Lösungsweg wie intensiv auch immer beschritten wird: In jedem Fall ist mit der asymmetrischen Information zwischen Agent und Prinzipal ein gewisser Loss of welfare verbunden. Die Kooperation zwischen Prinzipal und Agent ist daher nur eine second best Lösung.

It is not easy to express the loss of welfare as an amount of money. One way of measuring agency costs is through information value. The agency costs are equal to the maximum amount that the principal would be willing to pay if, in return, complete information were produced and he knew the real commitment and actual effort of the agent (just like the agent himself).

In diesem Fall vollständiger Information könnten dann direkt Niveau und Art von Anstrengung und Einsatz zum Gegenstand eines Vertrags zwischen Prinzipal und Agent gemacht werden. Sie könnten Leistung und Gegenleistung frei vereinbaren, eine first-best Allocation könnte entstehen.

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