Unformatted text preview: Agent-Principal Relationship Notes 8-23-12
An agency relationship is a relationship where one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf
Involves delegating some decision making authority to the agent
Someone (the principal) hires the agent to make decisions or suggest a course of action
Acts in his or her BEST INTEREST.
If both parties to the relationship are utility maximizers, there is good reason to believe that the agent will not always act in the best interests of the principal.
The agent may have an incentive to not acting in the best interest of the principal
maximize the principal's utility
Agent may act in his or her own best interest
maximize his or her own utility.
The agent can do this without the principal knowing because of information asymmetry
the agent knows something that the principal does not the agent has access to information that the principal does not have
the agent is able to do so without the principal knowing. Example: Car Purchaser= principal Car Salesman= agent The car salesman works for a commission and would like for you to purchase the highest priced car as possible so they will try to add as many additional prices for features as possible.
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