Principal-agent conflicts arise when a party (the agent) is compensated for performing a task that is useful to another party (the principal) but costly to the agent, and that contains elements that are difficult to observe due to asymmetric information, uncertainty or risk.
Principal-agent (agency) theory is a staple in economics (Stiglitz 2008), organization theory and political science. It originally described the conflicts between owners and managers of large organizations as well as the mechanisms that might curb the managers’ opportunistic behaviour, such as equity ownership (Jensen and Meckling 1976), efficient capital and labour markets (Fama 1980) and effective boards of directors (Fama and Jensen 1983). Later, this view expanded to include other relationships such as employer–employee or buyer–supplier, and focused on formalizing the most efficient contract alternatives under different scenarios of uncertainty, information or risk attitudes.
In standard economic...