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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 ...
This is called the principal–agent problem and is an important theory in economics and political science. Principal–agent theory has suggested that some governance mechanisms can help align the interest of the principal with those of the agent. Steering and monitoring are key mechanisms to bring this about. [4]
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.
Contract theory in economics began with 1991 Nobel Laureate Ronald H. Coase's 1937 article "The Nature of the Firm". Coase notes that "the longer the duration of a contract regarding the supply of goods or services due to the difficulty of forecasting, then the less likely and less appropriate it is for the buyer to specify what the other party should do."
In microeconomics, agency theory analyses the relationship between the principal, the party who delegates decision making authority, and the agent, who executes the service. This theory is a key concept used to explore and resolve issues that have arisen within the relationship of agents and principals, which is known as the principal-agent ...
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.
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 ...
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 .