Definition of Agency problem:
The agency problem does not exist without a relationship between a principal and an agent. In this situation, the agent performs a task on behalf of the principal. Agents are commonly engaged by principals due to different skill levels, different employment positions or restrictions on time and access. For example, a principal will hire a plumber—the agent—to fix plumbing issues. Although the plumber‘s best interest is to collect as much income as possible, he is given the responsibility to perform in whatever situation results in the most benefit to the principal.
The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. In corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth even though it is in the manager’s best interest to maximize his own wealth.
A conflict arising when people (the agents) entrusted to look after the interests of others (the principals) use the authority or power 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 completely because the costs of doing so sooner or later outweigh the worth of the results. Also called principal-agent problem or principal-agency problem.
How to use Agency problem in a sentence?
- There was an agency problem that was quite complex in this instance as there were many interests to be considered.
- Through regulations or by incentivizing an agent to act in accordance with the principal's best interests, agency problems can be reduced.
- Agency problem is a conflict of interest inherent in any relationship where one party is expected to act in the best interest of another.
- Agency problem arises when incentives or motivations present themselves to an agent to not act in the full best interest of a principal.
- The local police department had recently come under fire from the public questioning agency problem s and demanding accountability be taken for acting to their own benefit.
Meaning of Agency problem & Agency problem Definition