Principal Agent Problem Essay

3321 WordsMay 9, 201414 Pages
uke ssays.co m http://www.ukessays.co m/essays/eco no mics/the-principal-agent-pro blems-in-o rganizatio ns-eco no mics-essay.php The Principal Agent Problems In Organizations Economics Essay Need help? ☎ 0115 966 7955 Introduction T he signif icant discussion in business economics is principal-agent problems in organizations. A principal is a top authority who hires agents to act on his/her behalf , while an agent usually aims to achieve the objectives of the principal. A principal-agent problem arises when the activities of an agent impact on the principal’s interests (Rabin, 2003). Although agents may seek to attain the goals set by principals but may sometimes f ail to carry out those targets. T he conf lict between shareholders (as principals) and managers (as agents) is a good example of principal-agent problem (Jensen, et al., 1990). Grif f iths and Wall (2007) suggested that when ownership and control is divided between the principals and agents in an organisations this gives the agents opportunity to pursue the goals that may not agree with the desires of the principals. A lot of principal-agent relationships may be f ound in human society such as patients and doctors, shareholders and managers, managers and workers. But shareholder – manager and manager – workers are the common principal-agent problem relationships in a business organisation and so this essay will concentrate on that aspect. Also, this essay will critically examine what principal-agent problems that take place in organizations and how the problems can be overcome. Principal-agent problem such as the asymmetry of inf ormation, moral hazard, adverse selection, employer and the employee, and lack of motivation. Also, the theories of prof it and sales maximization will be discusses. Finally, the solution on how this principal – agent can be overcome will be discussed such monitoring, f

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