It is a conflict that is seen to be arising between the objectives and the goals. It happens for the principal and those agents who are supposed to represent this principal. There is authority that is given to the agent is what causes the issue of the principal agent problem. This kind of problem is usually faced in the corporate sector. This happens where the shareholders are the principal, and the managers become the agents. It can also be seen in the government set up. Here the public becomes the principal, and the leaders are the agents. Are you worried about your Principal Agent Problem Homework Help send us an email now for
How does the problem arise?
The problem of the principal and the agent arises when thee person who is the principal gives authority to another person who is the agent to take care of many things on his behalf. But as time progresses, the agent may not take all the actions that are necessarily in support to the principal or are in his best interests. The agent might want the satisfaction of utility at the personal level, but the principal would totally want something else. This is when the conflict between the two arises.
In order to understand thins better let us take the following example.
Let us assume the actions of a firm’s manager which is a historical museum. The primary duty of the manager would be to take care of the footwear or its preservation. But what the manger does is that he creates a parking space right in front of the museum gate, with the help of the money they are generating as a profit in the Shoe museum. This is highly not necessary as he visits very occasionally and it is of no use to the museum at all. These are just wastage of the money that could be put to better use. He would be the agent in this case. It was of no good to the public who use the museum who are the principal here.
Maximization of the utility:
The major reason for all these principal agent problems is that they are all people. They are all trying to find ways to maximize their utility. If the principal wants to maximize his utility, he needs the help of the agent to do it for him. But the agent is also a person who is trying to maximize his utility. If the agent can do it in such a way that there is benefit to him and also the principal, there would not be any issues arising. But the agent is intent on making himself happy first. That is why the issue arises.