Definition of Agency theory:
Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.
A way of studying the way that a broker and a client work together. This theory will help in determining the best incentives for both individuals in enacting a successful transaction, as well as seeking to reduce the expenses that are related to any potential disagreements between the broker and the client.
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 or principals have hired the agent to perform a service on their behalf.
How to use Agency theory in a sentence?
- Principals rely on agents to execute certain transactions, particularly financial, resulting in a difference in agreement on priorities and methods.
- Common principal-agent relationships included in agency theory include shareholders and management, financial planners and their clients, and lessees and lessors.
- The difference in priorities and interests between agents and principals is known as the principal-agent problem.
- Resolving the differences in expectations is called "reducing agency loss.".
- Performance-based compensation is one way that is used to achieve a balance between principal and agent.
- Agency theory attempts to explain and resolve disputes over priorities between principals and their agents.
Meaning of Agency theory & Agency theory Definition