Samples Problem Solution Agency Situation / Agency Problem

Agency Situation / Agency Problem

420 words 2 page(s)

The standard definition of an agency situation entails a basic conflict of interest in the corporate context. More specifically, in so far as there exists a corporate reliance on agents, this may lead to the situation where the agent pursues his or her own self-interest, with obvious negative effects on the principal. The need to have an agent as someone who operates in the interests of the principal (Garger, 2010) therefore does not mean that the pursuit of the interests of the principal are in fact fulfilled.

Hence, an agent acting on behalf of the principal, for example, may conduct business in the interests of the principal in a different city: the agent could then accrue unnecessary costs, for example, dining at haute cuisine restaurants. An agent may also take place in business deals with clients. Agency situations can also arise in other forms, such as the difference in interests between stockholders and corporate governance: stockholders may be seeking a quick profit, which damages the long-term aims of the company. In both these examples, what is at stake is an instance of “information asymmetry”, which is basically a divergence in terms of goals. (Stadler & Castrillo, p. 186)

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The concept of “information asymmetry” can help us resolve or mitigate agency situations. Namely, what is to be achieved is a variation of “information symmetry” that aligns goals and encourages transparency as fundamental to an effective and efficient agent-principal relation. In the case of the agent making self-motivated billings unnecessary to the task assigned to the agent, transparency here, for example, setting reasonable budgets and explaining to the agent what is acceptable use of billing can help mitigate this asymmetrical tension. The case of the stockholder is more difficult to resolve, since to restrict stockholder behavior is essentially a practice that is against the free market and stockholder concept: in this regard, agency-principal divergences must be mitigated by a plan that clearly delineates the quantity of publicly available stocks with the recognition that goals may diverge, i.e., thus taking account of this possibility.

Hence, whereas in the corporate system, by its very structure, it appears that agency-principal tensions are inevitable, the attempt to dissolve asymmetry and also account for it into business decisions can be utilized to mitigate its effect.

  • Garger, J. (2010). »Principal-Agent Relationships: Agency Problems, Monitoring, and Moral

    Hazards.« Bright Hub. Accessed 24 May 2013 at

  • Macho-Stadler, I. & Perez-Castrillo, J.D. (2001). An Introduction to the Economics of

    Information: Incentives and Contracts. Oxford, UK: Oxford University Press.