The principal agent problem is a problem that arises when one party, which is the agent, gets motivated instead of another party which is the principal. These are problems that arise in very many different types of contexts. These problems come up when the motivators that are between the principal and the agent are not aligned perfectly. This leads to a conflict of interest. When the two parties do not have the same interests, and the agent is more informed, this problem is likely to arise. This is because when the agent is more informed, it is hard for the principle to tell whether all actions that the agent undertakes are for his best interests.
The principal agent problem is a problem that cannot be solved completely. This is because in most cases the interests of the principal and those of the agent are most likely to differ. This is because a company may fire a manager because the profits decreased which shows that the manager is responsible but the other manager who will be hired may also be tempted to steal from the company.
Psychological egoism can be described as being motivated by only what will benefit themselves and not the others. This cane best explain the principal agent problem. This is because the agents do not mind the harm they cause to the principals as long as their interests are catered for. These agents only protect their interests instead of protecting the principal’s interests.
Bibliography
Grossman, Sanford J., and Oliver D. Hart. An analysis of the principal agent problem. New
York: University of Cambridge Department of Applied Economics, 1980.
