Today I Learned (TIL): What is the Principal-Agent Problem?

This post originally appeared on my other blog that pays me, and you if you want, to post and commentators to comment @ https://steemit.com/@strangerarray.

 

There is no shortage of conflict in the world.


Conflict of Interest
Image Source


We all have our own interest that we look out for, but sometimes what is best for us isn’t what is best for others.

Usually this isn’t a problem if you are okay with being labeled as “selfish” or “insensitive” or the other party just doesn’t know or care.

But wanting to do right, there is a need to take into consideration the interest of others.

In fact, that is one of the main ways Zig Ziglar suggests on how to become successful.


“You can have everything in life you want, if you will just help other people get what they want.”Zig Ziglar


Occasionally a situation may arise where what is best for you isn’t best for someone else.

More specifically this can occur in a work relationship.
You see this when one person or group is able to make decisions on behalf of, or that impact, someone else.

Or to put it simply when someone decides what you have to carry out without you getting a say.

More formally when this happens, it is known in political science and economics as the Principal–agent problem.

“The principal-agent problem develops when a principal creates an environment in which an agent’s incentives don’t align with its own. Generally, the onus is on the principal to create incentives for the agent to ensure they act as the principal wants. This includes everything from financial incentives to avoidance of information asymmetry.” – Source: Investopedia

Also, as explained on tutor2u.net:

What is meant by the principal agent problem?

  • The principal agent problem is an asymmetric information problem that stems from a divorce between ownership and control that is found in many businesses and other organisations
  • The owners of a firm often cannot observe directly the day-to-day decisions of management.
  • Decisions and performance of the agent can be costly and difficult to monitor accurately.
  • Managers may have different aims and objectives than the owners of the firm. This creates the risk of a principal-agent problem.

Source


The Principal-Agent Problem begs the question of “What can be done about the conflict of interest?”


A Principal-Agent Problem from the Manager-Worker Perspective


This video shows how, from a management perspective, a way to “Spot Check” employees to ensure proper performance and compliance.

This is probably preferable to both parties than the alternative of micromanaging.

Although I strive for and encourage personal responsibility, integrity, honesty and other lofty virtues, I have been around long enough to know they are not always the status quo.

Several factors go into the decision-making process of why we humans do what we do.

Understanding what drives us and directs our actions will help us better understand what we can do to achieve a resolution.

But that is an entirely different study for another day…


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Michael


Created by Michael Paine
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