Agency Theory

Agency Theory is a process of subcontracting used in business, in which a principal and an agent, which has a power to act on behalf of the principal, are related.


Agency Theory

The purpose of Agency Theory is to solve the problems that may arise in the company due to the separation between property and control, because managers and shareholders have different interests.
 
Some reasons for Agency problem are:
  • Managers and agents have different interests in maximizing their own profit, for that reason, the principal and agent are in conflict.
  • When the principal and agent act differently towards risk, so they take different actions.
  • When the principal focuses on the short-term performance, while agents focus on the long-term.

There are different ways to solve these problems:

1) Monitoring: Looking at the way to act of agents, trying to establish a good relationship between them.
2) Bonding: To carry out different actions to penalize for acting against ways the interests of principals. On the other hand, agents are rewarded for principal’s goals achieved.

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Which of these relationships are agency?

Which of these relationships are agency?

Easy explanation of Agency Theory

Easy explanation of Agency Theory