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Principal-Agent-Theory

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by

Manuel Engert

on 11 October 2013

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Transcript of Principal-Agent-Theory

Principal-Agent-Theory
Definitions
An agency relationship [is] a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. (Jensen/Meckling, 1976)
Can you think of any examples?
Problems
Information asymmetries and
Adverse selection

Moral hazard

Risk sharing

Goal/Interest divergences
Sarah Engel, Verena Hofmann, Manuel Engert
11.10.2013
Institutional Economics Approach
Institutional economics is defined as economic thought that considers institutions (e.g. an organization) to be relevant for economic theory.
1. Classification in Organization Theory
2. Definitions
3. Problems
4. Problem Solving Techniques
Classification within Organization Theory
Agency theory is directed at the ubiquitous agency relationship, in which one party (the principal) delegates work to another (the agent), who performs that work. Agency theory attempts to describe this relation-ship using the metaphor of a contract. (Eisenhardt, 1989)
Overview and
Basic Assumptions
Bank customer (principal)
and
Banker (agent),

Voters (principal)
and
Politicians (agent),

Dental patient (principal)
and
Dentist (agent).
How to solve them?
Incentive Compensation Systems
Performance measurement,
Commissions and profit sharing,
Efficiency wages,
the transfer of ownership towards the agent,
the threat of termination of employment,

Market
Design of Contract
Formal control systems,
Budget restrictions,

Investing in Information
= Agency Costs
Questions ?
Full transcript