The principal-agent problem emerges when there is an information gap between the principals and the agents, which enables the agents to benefit from their superior grasp of the production processes to the cost of the principals. This situation is known as the principal-agent dilemma (Sloman et al. 2019). Because no one in the process of creating pencils has a complete grasp of the roles that the others play, everyone is just concerned with protecting their own interests (Read, 1945). Using a contract that is based on incentives to promote the interests of all parties involved is one potential approach that may be taken to address the issue with the agency relationship (Sloman et al. 2019).

Sloman, J., Garratt, D., Guest, J. & Jones, E. (2019) Economics for Business Enhanced. 8th ed. Harlow: Pearson International Content. Available via the VitalSource Bookshelf

QUESTION

How can we best resolve the principal-agent conflict so that everyone benefits equally?

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