Agency Theory: Principal-Agent Problems
I need to understand the principal-agent problems that arise in organisations. Thanks...
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Bruno, Peru
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Principal Agent Problems
Agency Theory refers to the delegation of work from one party to another.
The principal delegates work to an agent.
In the case of a corporation, the term of 'principal' corresponds to owners and 'agent' to directors.
Conflicts of interest can arise such as:
- The agent misusing his power for pecuniary or other advantage;
- The agent not taking appropriate risk in pursuance of the principal´s interests due to the dimension of the risk can be different between both;
- Information asymmetry can be another problem due to different levels of information they have.
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