Notes

The Principal-Agent Problem

Principal–agent problem - Wikipedia
- Principal = Shareholders of the business
- Agent = Employees of the business
The agents (employees) are acting on behalf of the principles (shareholders).
A conflict in priorities between the owner of an asset (Principal) and the person to whom control of the asset has been delegated (Agent).
The challenge lies in ensuring that the Agent’s actions align with the Principal’s interests, even when the Agent has their own motivations and incentives.
Designing an effective incentive scheme/model/system is key.
- “Show me the incentives – and I’ll show you the outcome.”
- “You get what you reward for. If you have a dumb incentive, you get dumb outcomes.”
The goal is to align the interests of both groups and to remove any conflict of interests of both groups.
- Key: Skin in the game (切膚之痛) = Accountability

The Principal-agent Problem