Original uploader was MisterX000 at en.wikipedia
Monday, February 10, 2014
The agency theory Is something that all employers have in common. All employers have to deal with The issue of how to get another individual to perform in the interest of the employer rather than their own self interest. This is usually done through wages provide incentive for that agent(employee) to align at least some of their self interest with that of the principal (employer). However, wages can lead to problems of their own. Quite often agents will not perform to the best of their abilities simply because the wage is too low, or the work is too difficult. Also agents may decide that once they have their money they don't need to continue to work especially if they are not concerned about their own reputation. The biggest problems arise when the agent has more knowledge than the employer and has very different personal interests from those of the employer. Because of this, some employers choose to employ less people even take the risk of having a less than efficient agent. This can lead to a suboptimal outcome where neither party is better off even when the employment would have been a greater benefit. In essence it comes down to the incentives of the individuals involved have and the amount of trust they have each other to ultimately determine whether or not to engage in an employment.