Principal Agent Problem

The principal agent problem arises whenever one person has to motivate another to act in his behalf. Wikipedia, the free, on-line encyclopedia, says:

In political science and economics, the principal-agent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent. Various mechanisms may be used to try to align the interests of the agent with those of the principal, such as piece rates/commissions, profit sharing, efficiency wages, performance measurement (including financial statements), the agent posting a bond, or fear of firing. The principal-agent problem is found in most employer/employee relationships, for example, when stockholders hire top executives of corporations. Numerous studies in political science have noted the problems inherent in the delegation of legislative authority to bureaucratic agencies.

Entrepreneurs need to care about this because anytime they either hire someone or even ask have a friend work in your business this problem is a 500 pound Gorilla in the room. Whenever you hire a consultant or artist to do some promotional work, there you are.

What do you think about this? You must have been on the other side of this as an employee. Post a comment.

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