In order to explain this let us consider the political entrepreneurs. The politicians who are intent on having a post in the government and are contesting in the elections are the ones who are the heirs to the resources that are allocated by the government action.

They are ready to take a risk in order to organize their production. They do the organization process with the help of the laws put down by the government. They have the risk of losing elections and have the risk of failure of policies too. Their failure is also due to the utility maximizing actions. When they are satisfied by what they get to forget what is actually needed to be done for the rest of the society who has made him win.

The business entrepreneurs take a risk in the organization of the production of the private goods. They are the ones exchanged through the market. This is in a similar way as the politicians who take a risk on the production of the public goods along with the government activities. The product sold by the politicians is the policy that they frame. In the case of the business entrepreneurs, it is the products that they sell.


The Risks

The business entrepreneurs face the risk of failure. They may not be able to produce a good which the customers are ready to buy. They may not be able to make money as much as they had expected. They might even go bankrupt in the worst case scenario.


Principal-Agent Problem

There is the problem of the principal agent. It is commonly used in the corporation scenarios.  This is talked about when the principal is supposedly the stockholder. It could also be the owner of the corporation. The agent would be the person who is hired to do his work.

There are no issues when the work is happening smoothly. When the agent tries to get more wealth on a personal basis that is not in line with the goal of the principal (owner), then the problem starts. This is called as the Principal- Agent problem.

Basically, the principal- agent problem is the one arising due to the conflict in ideas or objectives between the owner and the employee who works for him.


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