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Agency problem

The agency problem was originally identified by Adam Smith, whereby agents (executives) managed companies in their own self-interest rather than that of their principals (shareholders).

The agency problem refers to the conflicts of interest that can arise when one party (the principal) hires another party (the agent) to act on their behalf. The agency problem arises because the interests of the principal and the agent may not be aligned, and the agent may act in their own self-interest rather than in the best interests of the principal.

The agency problem is a common occurrence in business and economics, and it can take a variety of forms. For example, the agency problem can arise when shareholders hire management to run a company, or when a principal hires an agent to sell a product or service. In these cases, the principal is relying on the agent to act in their best interests, but the agent may have different objectives or incentives that could lead to conflicting interests.

The agency problem can be mitigated through various means, including the use of contracts and performance incentives to align the interests of the principal and the agent, and the use of oversight and monitoring to ensure that the agent is acting in the best interests of the principal.

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