What is agency theory in economics?

Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.

What is the main suggestion of agency theory?

Agency theory suggests that, in imperfect labor and capital markets, managers will seek to maximize their own utility at the expense of corporate shareholders.

Who introduced agency theory?

The agency theory was first introduced by Stephen Ross and Barry Mitnick in 1973 (Mitnick 2013 and is characterized through the conflict of interest between principal (owners) and agents (managers), known as an “agency problem”.

What is the agency theory triangle?

The Agency Theory Triangle clearly shows that no entity functions in isolation. It also indicate that there are FOUR (4) parties involved in building this triangle.

What are the two types of agency problems?

We focus on two types of agency conflicts: controlling-minority shareholders conflicts and shareholder-bondholder conflicts.

What are the types of agency?

There are five types of agents.

  • General Agent. The general agent.
  • Special Agent.
  • Agency Coupled with an Interest.
  • Subagent.
  • Servant.
  • Independent Contractor.

Who is the father of agency theory?

Agency theory was developed by Jensen and Meckling (1976). They suggested a theory of how the governance of a company is based on the conflicts of interest between the company’s owners Page 3 (shareholders), its managers and major providers of debt finance. Each of these groups has different interests and objectives.

What is positive agency theory?

Positive agency theory proposes that principals can mitigate agency costs by establishing appropriate incentive contracts and by incurring monitoring costs.

What are the three types of agency problems?

The three types of agency problems are stockholders v/s management, stockholders v/s bondholders/ creditors, and stockholders v/s other stakeholders like employees, customers, community groups, etc.

What are the types of agency theory?

Two forms of agency theory have developed: positivist and principal-agent (Jensen, 1983). Positivist researchers have emphasized governance mechanisms primarily in large corporations.

What are the 3 agency problems?

How can agency problems be avoided?

Conflicts of interest can arise if the agent personally gains by not acting in the principal’s best interest. You can overcome the agency problem in your business by requiring full transparency, placing restrictions on the agent’s capabilities, and tying your compensation structure to the well-being of the principal.