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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 ...
The relationship between a company's shareholder and the board of directors is generally considered to be a classic example of a principal–agent problem.The problem arises because there is a division between the ownership and control of the company, [10] as a result of the residual loss.
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]
One example is a principal–agent approach (also called agency theory), where one party, called an agent, acts on behalf of another party, called the principal. However, a principal–agent problem can occur when there is a conflict of interest between the agent and principal. If the agent has more information about his or her actions or ...
In this case, the agent's type is his or her health status, which is privately known by the agent. Another prominent example is public procurement contracting: The government agency (the principal) does not know the private firm's cost. In this case, the private firm is the agent and the agent's type is the cost level. [17]
Information asymmetries are studied in the context of principal–agent problems where they are a major cause of misinforming and is essential in every communication process. [10] Information asymmetry is in contrast to perfect information, which is a key assumption in neo-classical economics. [11]
Examples of this problem are adverse selection [28] and moral hazard. Most commonly, information asymmetries are studied in the context of principal–agent problems . George Akerlof , Michael Spence , and Joseph E. Stiglitz developed the idea and shared the 2001 Nobel Prize in Economics.
An example of such an interaction is when interest groups support bureaucracies by providing information and facts about areas the bureaucracy is meant to promote or serve. [10] [11] Other scholars, however, have found that interest groups can cause bureaucratic drift. When a bureaucratic agency is infiltrated or corrupted by an external group ...