Pub. date: 2011 | Online Pub. Date: October 04, 2011 | DOI: 10.4135/9781412994163 | Print ISBN: 9781412959636 | Online ISBN: 9781412994163| Publisher:SAGE Publications, Inc.About this encyclopedia
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 ...