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In economic theory, the principal-agent approach (also called agency theory) is part of the field contract theory. [36] [37] In agency theory, it is typically assumed that complete contracts can be written, an assumption also made in mechanism design theory. Hence, there are no restrictions on the class of feasible contractual arrangements ...
Since there is asymmetric information, where the principal is not necessarily aware of what the agent is doing, moral hazard can exist: the agent can act in such a way that the agent's own interests are met, rather than those of the principal. [4] This is called the principal–agent problem and is an important theory in economics and political ...
In economics, an agent is an actor (more specifically, a decision maker) in a model of some aspect of the economy. Typically, every agent makes decisions by solving a well- or ill-defined optimization or choice problem. For example, buyers and sellers are two common types of agents in partial equilibrium models of a single market.
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.
Labor theory of value – Labour economics – Labor union – Laffer curve – Laissez-faire – Land (economics) – Land value tax – Law and economics – Legal origins theory – Lerman ratio – Limit price – List of unsolved problems in economics – List of topics in industrial organization – Lemon market – Living wage – Local ...
In economics, the field of contract theory can be subdivided into the theory of complete contracts and the theory of incomplete contracts. [1] Complete contracting theory is also called agency theory (or principal-agent theory) and closely related to (Bayesian) mechanism design and implementation theory.
Such a situation runs counter to neo-classical economic theory. The neo-classical market is instantaneous, forbidding the development of extended agent-principal (employee-manager) relationships, planning, and of trust. Coase concludes that “a firm is likely therefore to emerge in those cases where a very short-term contract would be ...
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 ...