Principal-agent problem

The principal-agent problem is a phenomenon from the game theory analysis of institutions. It consists in the fact that a client (the principal) who sets economic goals and a contractor (the agent) who is supposed to fulfill the goals do not have similar information and interests. Rather, there is an information asymmetry.

While the principal has the power to set goals and determine the agent, the agent has an information edge on goal achievement. He knows whether and how, given his abilities, he is even able to meet the goals and how far he will progress. The solution to the principal-agent problem consists of incentive mechanisms that bring the different goals to a large extent in agreement with the different information levels.

The principal-agent problem is primarily applied to the relationship between company owner and manager and between company management and employees.

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