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Management and Organization Theory: A Jossey-Bass Reader by Jeffrey A. Miles

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3

Agency Theory

Since the late 1700s, theorists have discussed the problem of corporate owners hiring others as stewards of their wealth. Managers of other people’s money cannot be expected to watch over it with the same zeal as the owner, so managerial negligence will always be present in the affairs of a company (Smith, 1776/1952).

According to agency theory, an agent or agency is hired by one or more person(s), called the principal(s), under a contract and is compensated by the principal to achieve desired outcomes for the principal. Because the agent is acting on behalf of the principal, the principal gives away some decision-making authority to the agent.

Agency relationships occur in a wide variety of situations and contexts that involve ...

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