agency problem

Definition

Conflict arising when people (the agents) entrusted to look after the interests of others (the principals) use the authority or power (given to them, directly or indirectly, by the principals) for their own benefit instead. It is a pervasive problem and exists in practically every organization—whether a business, church, club, or government. Organizations try to solve it by instituting measures such as tough screening processes, incentives for good behavior and punishments for bad behavior, watchdog bodies, and so on—but no organization can remedy it 100 percent because the costs of doing so sooner or later outweigh the worth of the results. Also called principal-agent problem or principal-agency problem.