Principal–Agent Theory

Victor Lapuente

Principal–agent theory (PAT) was developed in the field of economics in the 1970s to understand the prevailing problems that appear every time Person A (the “principal”) asks Person B (the “agent”) to do something on his or her behalf for a given price. The basic assumption of PAT is the existence of a double asymmetry between the principal and the agent, since they have different preferences (e.g., the customer/principal wants healthy teeth, while the dentist/agent wants to receive good pay) as well as different levels of information (e.g., the customer/principal can observe the outcome but not the costs of the action that the dentist/agent takes). The solution to this double asymmetry is an outcome-based contract in which it is stated that the agent receives a bonus in case a certain outcome is reached. PAT explores how these contracts should be designed according to the variations in the informational asymmetries between ...

Users without subscription are not able to see the full content on this title. Please, subscribe or login to access all content on this website.