Being subjugated by the agent that he decides not to enter into a deal at all, when that deal would have essentially been in all parties best interests: a suboptimal result that lowers overall welfare. The divergence from the principals concern by the agent is known as agency costs (Bebchuk & Fried 2004, pg. Various means might be used to bring into line the welfare of the principal to those of the agent. The agent and principal theory appeared in the 1970s from the joint disciplines of institutional theory and economics. There is some argument as to who invented the theory, with theorists Barry Mitnick and Stephen Ross claiming its authorship (Mitnick 2006).
Ross is said to have initially described the problem in terms of someone choosing a taste of ice-cream for somebody whose flavors he is not aware of. The most quoted reference to this hypothesis nonetheless comes from William Meckling and Michael Jensen (Jensen & William 1976, pg 305-360). The conjecture has come to expand well beyond institutional studies or economics to all situations of information asymmetry, risk and uncertainty.
In the perspective of law, a principal does not know adequate about whether or to what extent a contract has been contented, and they end up with agency costs. The resolution to this information predicament closely connected to the moral hazard crisis is to make sure the prerequisite of suitable incentives so agents works in the way principal’s desire. In relation to game theory, it entails changing the rules of the game so that the self-interested coherent choices of the agent correspond with what the principal wishes. Even in the restricted arena of pay contracts, the trouble of doing this in practice is replicated in a huge number of reimbursement mechanisms and supervisory systems, as well as in the analysis of such methods. The agent principal problem is wide enough one that it can be found in an extensive variety of contexts.
An instance of how the agent principal problem happens between ratings agencies and the corporations which are the principals that hire them to set a recognition rating. Since a low rating will enhance the cost of sponging for the company, it has an inducement to structure its reimbursement of the rating agent so that the agency offers a higher ranking than what may be warranted.
The ranking agency is less probable to be objective since it fears losing prospect business by being too harsh. An agent principal problem could just as
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