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The principal–agent problem typically arises where the two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agent is always acting in the principal's best interest, particularly when activities that are useful to the principal are costly to ...
In microeconomics and contract theory, the first-order approach is a simplifying assumption used to solve models with a principal-agent problem. [1] It suggests that, instead of following the usual assumption that the agent will take an action that is utility-maximizing, the modeller use a weaker constraint, and looks only for actions which satisfy the first-order conditions of the agent's ...
An agency cost is an economic concept that refers to the costs associated with the relationship between a "principal" (an organization, person or group of persons), and an "agent". The agent is given powers to make decisions on behalf of the principal. However, the two parties may have different incentives and the agent generally has more ...
The multiple principal problem, also known as the common agency problem, the multiple accountabilities problem, or the problem of serving two masters, is an extension of the principal-agent problem that explains problems that can occur when one person or entity acts on behalf of multiple other persons or entities. [1]
In modern contract theory, "adverse selection" characterizes principal-agent models in which an agent has private information before a contract is written. [ 23 ] [ 24 ] For example, a worker may know his effort costs (or a buyer may know his willingness-to-pay) before an employer (or a seller) makes a contract offer.
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The gift-exchange game simulates a labor-management relationship execution problem in the principal-agent problem in labor economics. [2] The simplest form of the game involves two players – an employee and an employer. The employer first decides whether they should award a higher salary to the employee.
Mathew McCubbins, Roger Noll, and Barry Weingast first defined the theory of bureaucratic drift in 1987. [1] They argued that drift is essentially a principal-agent problem that explores "how—or indeed, whether—elected political officials can reasonably effectively assure that their policy intentions will be carried out."