Agency Theory

Synonyms

Agency costs; Agency dilemma; Agency problem; Agency risk; Principal-agent problem

Definition

Agency theory is concerned with problems that arise where one party (the agent) is expected to act in the interests of another party (the principal), but the agent’s own interests may conflict with the principal’s interests, and the principal cannot fully monitor and discipline the agent. Agency theory is widely referenced in business, economics, and political science, where it is often identified as the “principal-agent problem.” In business applications, the emphasis is usually on “agency costs,” which are the costs borne by either the agent or the principal as a consequence of agency problems.

Discussion

Agency problems arising from conflicts of interests between the principal and agent are greatest under information asymmetry. Here, the relevant form of information asymmetry is where the agent has more information than the principal regarding opportunities or the agent’s...