This
week's reading was very hard to comprehend, so it's possible I may have
misunderstood much of it. Still, what I got out of the reading was that the
agency relationship is when a person or more people called the principal(s)
have another person called the agent to hand over the making of decisions to
the agent. That last statement was very difficult to extract from the reading
and see how it applies to economics or business in general because of its
theoretical or academic nature. It appears that the article discusses the
relationships between the employers that are the principal and the employees
that are the agents, so it appeared that the relationship refers to the agent
representing the principal that endows the power of making decisions on the
behalf of the principal.
As a
result, there must be problems that arise from the relationship just as they
would in any other case. I believe a moral hazard can arise when the employer
and employee work for the same goal when having different interests in doing
so. Interests are very important because someone may fulfill their obligations
as an employee or employer, while fulfilling those obligations for interests
that can be good or bad. Please note that I may be wrong on this theory, but
this is what I thought the reading was trying to refer to so it's very possible
I have erred on such a complicated topic.
I
believe the moral hazard to the employer and employee relationship can arise
when someone has undesirable interests with an incentive to pursue those
interests. Thus, I believe it's important for the employer and employee to
ensure there's a mechanism that would not allow for a party to create a moral
hazard, but this is very theoretical and it's very likely that this is nearly
impossible to do so. Finally, the reading was quite interesting in how it
involved some complicated modeling on the theory to ensure it was correct, but
my interpretation likely deviated because more experience and knowledge is
required to fully understand the thoery.
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