ECONOMICS, ORGANIZATIONS & POLITICS
Principal–Agent Analysis
Who decides, and who pays?
What it means
A principal entrusts an agent to act on the principal’s behalf. Problems arise when the agent has more information, pursues different interests, or does not bear the consequences. Authority and accountability have become separated.
Typical uses
Employees and employers, officials and voters, executives and shareholders, contractors and clients, regulators and the public.
ORIGIN
Where the idea came from
- Creator or lineage
- Stephen A. Ross
- Country
- United States
- Years
- 1944–2017
- Development
- Formalized in economic agency theory in 1973.
- Catchphrase
- “Who decides, and who pays?”
Problems arise when a decision-maker’s interests or information differ from those of the person represented.
Read the source: Original 1973 economics paperQUESTIONS TO ASK
- Whose interests should guide the decision?
- Does the agent bear the result?
- How can performance be observed and corrected?
You do not need to know this concept’s name to use its reasoning. The name simply helps you recognize, examine, and discuss the pattern.
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