Agency Theory

Agency theory is a well-known economic theory that plays a predominant role in management education. An agency, in broad terms, is any relationship between two parties in which one, the agent, represents the other, the principal, in day-to-day transactions. The principal hires the agent to perform a service on his or her behalf. We emphasize that the principal does not hire the agent only to perform a specific well-defined task. In a principal-agent relationship, the principal also delegates decision-making authority to the agent. This is an important distinction, as it is the authority to decide how to perform the service that gives rise to conflicts. Principals delegate work to agents with hopes that the agents will ...

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