The agency problem can be intensified when an agent acts on behalf of multiple principals (see multiple principal problem). The principal–agent problem typically arises where the two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agent is always acting in the principal's best interest, particularly when activities that are useful to the principal are costly to the agent, and where elements of what the agent does are costly for the principal to observe. Principal-agent models typically either examine moral hazard (hidden actions) or adverse selection (hidden information). In all these cases, the principal has to be concerned with whether the agent is acting in the best interest of the principal. Ĭommon examples of this relationship include corporate management (agent) and shareholders (principal), elected officials (agent) and citizens (principal), or brokers (agent) and markets (buyers and sellers, principals). The deviation from the principal's interest by the agent is called " agency costs". The problem worsens when there is a greater discrepancy of interests and information between the principal and agent, as well as when the principal lacks the means to punish the agent. The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the " agent") takes actions on behalf of another person or entity (the " principal").
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