Principal-agent relationship

Example:

Naghire ako ng isang carpenter para gumawa ng cabinet. Ang pagbibigay ng

sahod ay araw-araw. A principal agent problem can arise as yung interest ng
karpentero ay magkaiba sa interest ko. Dahil alam ng karpentero na ang
sahodan ay per day, pwede niyang bagalan ang paggawa para maextend yung
days of service nya pra dumami pa ang sahod. Wala akong magagawa pra ma
prevent ito kasi wala naman akong alam sa pagkakarpentero. So, the agency
cost is the extra amount na bayad ko sa knya para matapos nya lang yung
cabinet.

Reducing Agency Costs

Financial incentives are the most common incentives scheme. For

example, if an organization achieves a certain goal, the management
team would receive a monetary bonus. Financial incentives based on
performance help motivate agents to act in the best interest of the
company. Examples of financial incentives are:

 Stock options: Allows the person to buy a particular number of

shares at a predetermined price
 Profit-sharing: Management receives a percentage of the
company’s profits