Principal agent problem
Definition. The principal agent problem arises when one party, the agent, makes decisions on behalf of another, the principal, but the two have different objectives and the principal cannot perfectly monitor the agent. In firms it occurs because owners, the principals, delegate control to managers, the agents.
Managers may pursue goals such as higher salaries, prestige, or an easier life rather than maximising profit for shareholders. This divorce of ownership from control can lead to profit satisficing instead of profit maximisation.
This term belongs to The Objectives of Firms in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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