If we take the example of the company directors and shareholders. So how can this be solved? Well it depends on the situation, but the solution lies in trying to align their interests. The principal agent problem arises when the interests of each party are not aligned. In turn, the customer may end up paying for work that they donвЂ™t need. This comes under asymmetrical information as the customer knows less than the agent. If we also consider the fact that the customer does not necessarily know what needs to be fixed, it can lead to greater costs that are not needed. It is in the interest of the agent to make money from the customer. In this example, the tradesman or woman is the вЂagentвЂ™, whilst the customer is the вЂprincipleвЂ™.

This is because the tradesman or woman may have a direct conflict of interest with the customer. In trades such as engineering, plumbing, gas engineering, and electrics, they can all create a principal agent problem. It was seen as an elitist move by the President and one that was not popular among the public. One of the main points of dispute was abolishment of a wealth tax on the rich. In France for instance, President Macron has averaged around a 60 percent disapproval rating during his tenure. We can also move this forward to 20 which saw violent protests against the government in both France and Hong Kong. It was met with fierce resistance including a number of riots in the streets. On occasion, this happens because the two parties interests do not align.ДЇor instance, the UK government introduced the вЂPoll TaxвЂ™, essentially a yearly tax on home owners, in 1990. The principal agent problem occurs when those in government do not carry out the will of the people and fail to represent them effectively. They are acting on behalf of the voters and the public. Those who are in power are the agents, whilst the voters are the principals. Government and the PublicД«y its very definition, the government is meant to represent the will of the people. Often, psychological techniques are used in order to push the buyer up into higher price brackets so the salesperson makes more. By contrast, the bride is usually restricted by a budget and the need to keep costs down. In turn, they are incentivised to get the bride to fall in love with a dress outside of her budget. So it is in the interest of the salesperson to get as high of a sale as they can. For such a big day, the brides budget can increase rapidly if they fall in love with a specific dress. However, salespeople often show the customer more expensive cars in the hope they will fall in love with one at a higher price.ДЄnother example can be seen in wedding dress shopping. For instance, the customer may want to buy a car for $20,000. In turn, we often see a salesperson going beyond the customers budget in a bid to get them to spend more. So they are also incentivised to make bigger sales. However, higher ticket items mean higher commissions. The majority of sales jobs are based on commission, so a salesperson is incentivised to make a sale.

Often, we find that upon delivery, some goods run out of date the next day.

However, the customers interests lie in obtaining foods with long dates and items that are fresh. The two parties do not align in the fact that store employees are encouraged to pick as many items as possible.

In fact, one of the companies leading investors, Warren Buffett, said it was a вЂbad dealвЂ™ and would have voted against it given the chance. What happened was the board of directors bypassed the shareholders to get the deal passed. However, KraftвЂ™s purchase of Cadburys in 2010 avoided doing so by restructuring the acquisition through an option made available in US law. If we look at company acquisitions, shareholders generally have a right to vote. The principal agent problem arises when the interests of the CEO do not align with the shareholders. They are the agent that acts on behalf of the principal вЂ“ the shareholders. The problem then arises when the interests of the agent and the principal do not align.ДЇor instance, the CEO of a big firm is in charge of running it. So the agent acts on behalf of the principal. In this case, the principal refers to the person who delegates authority and responsibility to the agent. The Principal Agent Problem is where there is a conflict of interest between вЂthe principalвЂ™, and вЂthe agentвЂ™. WRITTEN BY PAUL BOYCE | Updated 25 March 2021 What is the Principal Agent Problem?

Agent and principal definition