Principal-agent relationship

Principal-agent relationship,

Definition of Principal-agent relationship:

  1. A principal-agent relationship is often defined in formal terms described in a contract. For example, when an investor buys shares of an index fund, he is the principal, and the fund manager becomes his agent. As an agent, the index fund manager must manage the fund, which consists of many principals' assets, in a way that will maximize returns for a given level of risk in accordance with the fund's prospectus.

  2. The principal-agent relationship is an arrangement in which one entity legally appoints another to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act. The relationship between the principal and the agent is called the "agency," and the law of agency establishes guidelines for such a relationship.

  3. A type of relationship whereby one individual acts on behalf of someone else. In this case, the individual who is considered the agent will work on behalf of the individual who is the principal.

How to use Principal-agent relationship in a sentence?

  1. A principal appoints an agent to act on their behalf and in their best interest. Examples include an investor picking a fund manager or someone hiring an attorney for legal work. .
  2. There should be no conflict of interest between the two, if there is, this creates a principal-agent problem. .
  3. The principal-agent relationship is expressed clearly through a written contract or is implied through actions.

Meaning of Principal-agent relationship & Principal-agent relationship Definition