The Principal-Agent Problem

“Delegating a task also delegates information and room for judgment.”

01 / PLAINLY

What it means, plainly

This problem arises when one party asks another to act on its behalf but their goals or information do not fully match.

02 / CONTEXT

A little more

A principal-agent problem arises when one party asks another to act on its behalf but their goals or information do not fully align. Contracts, monitoring, and reputation seek alignment with costs and limits.

03 / WHY IT MATTERS

Why it matters

A metric or contract may reward behavior different from what the principal actually wanted.

04 / EXAMPLE

A familiar example

Shareholders want durable value while managers rewarded for quarterly figures may favor a different horizon.

05 / LIMIT

What it does not mean

It assumes neither fraud nor an immoral agent; incomplete measurement alone can create the difficulty.

06 / NOTICE

Notice it in your day

Choose a delegated task and fill three boxes: real goal, unseen action, and behavior rewarded by the metric. Look for one possible mismatch.

FINAL NOTE

The idea worth keeping

Identify what is delegated, what remains unseen, and which behavior the chosen metric rewards.

QUESTIONS / 02

Questions people still have

Does the principal-agent problem assume fraud?

No. It can arise without deception because goals or measurement do not fully align.

What do contracts and monitoring try to do?

They try to align the agent's behavior with the principal's goal, though both have costs and limits.