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Explain the difference between a principal and an agent. How does this difference create the ‘principal-agent problem.

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Claire Manning

on 5 December 2011

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Transcript of Explain the difference between a principal and an agent. How does this difference create the ‘principal-agent problem.

Explain the difference between a principal and an agent. How does this difference create the ‘principal-agent problem’? Principal - Agent Problem Who are Principals and Agents?
What are the differences?
Conclusion Possible solutions References Begg, D And Ward, D. (2007). Growth Strategies. In: Begg, D And Ward, D Economics For Business . 2nd Ed. Berkshire: Mcgraw-Hill Education. P. 169.
Image - First Slide - Harvard Business Manager (2011) Prinicpal - Agent Theory. [Online] Available at: http://www.harvardbusinessmanager.de/heft/artikel/grossbild-590966-1358447.html (Date Accessed: 22nd November 2011)
Begg, D And Ward, D. (2007). Growth Strategies. In: Begg, D And Ward, D Economics For Business . 2nd Ed. Berkshire: Mcgraw-Hill Education.
Wit and Meyer (2004). Strategy – Process, Content, Context – An International Prospect. 3rd Edition. London: Thomson Learning
International Energy Agency (2007) MIND THE GAP – Quantifying Principal-Agent Problems in Energy Efficiency, France, 2007. Stedi Media. [Online]. Available at: http://www.iea.org/textbase/nppdf/free/2007/mind_the_gap.pdf (Date Accessed: 22nd November 2011)
Image - Fourth Slide - WordWorkersWorkshop(2011) Bridges. [Online] Available at: http://www.woodworkersworkshop.com/resources/index.php?cat=420 (Date Accessed: 22nd November 2011)
Principals Agents "A Principal is a person who hires an Agent to undertake work on their behalf." Begg And Ward (2007:169).

An Agent is hired to pursue the Principals interests.

Who is the Principal? Who is the Agent?
Taxi Hire
Travel Agents
Home Insurance
Shareholders
Cash exchanged for Shares
Financial interest only
Profit Maximisation
Ownership of the company


Managers
Work (labour) exchanged for a salary
Little financial interest in the business
Personal perks. E.g. company car
Run the company day-to-day

Conflict of interests
and incentives
Separation of ownership from control
Moral hazards
Agency costs
Relationship type



Profit Sharing
Efficiency wages
Piece rate
Pay
More communication between Principals and Agents - change in relationship type.

Possible negatives with all solutions.
Gap needs to be bridged to bring Principal and Agent interests closer.
Solutions dependent on business type.
Full transcript