>[!abstract] >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"). 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 deviation from the principal's interest by the agent is called "agency costs". > >Common 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). In all these cases, the principal has to be concerned with whether the agent is acting in the best interest of the principal. Principal-agent models typically either examine [[Moral hazard|moral hazard]] (hidden actions) or [[adverse selection]] (hidden information) (Wikipedia, 2025). >[!references] >- Ravikant, N. (2019). (2019, July 8). *Principal-agent problem: act like an owner*. https://nav.al/principal-agent >[!related] >- **North** (upstream): [[Agency theory]] (the study of principal–agent relationships and incentive alignment) >- **West** (similar): [[Moral hazard]] (agents take excessive risks because principals bear the costs) >- **East** (different): [[Perfect alignment of incentives]] (where principal and agent interests are fully congruent, eliminating conflict) >- **South** (downstream): —