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MENTAL MODEL · M4668

Principal-Agent Problem

Principal-Agent Problem
BusinessHigh supportMicroeconomics
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Updated 2026-08-02

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INTRODUCTION

English translation pending.

CORE DEFINITION

The principal-agent problem describes the difficulty a principal, such as a shareholder or a voter, faces when delegating to an agent, such as a manager or a politician. Because the agent holds more information about effort and conditions, and because the two parties' objectives differ, the agent can quietly pursue private gains. Economists Michael Jensen and William Meckling formalized the resulting agency costs. The problem appears as moral hazard after contracting and as adverse selection before it. Key limits: monitoring is costly, contracts are incomplete, and some divergence of interest is unavoidable in any delegation.

SCAFFOLDING EFFECT

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Reduce cognitive load

- Design incentives: align payoffs so the agent's best move also serves the principal's goal. - Locate hidden action: ask where the agent's effort is unobservable and where interests diverge. - Audit governance: check whether oversight and disclosure actually reach the information asymmetry.

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Anchor fast decisions

Delegation creates an information gap: the agent observes effort and local conditions, while the principal observes only outcomes. Since outcomes mix effort with luck, the principal cannot infer effort reliably, and the agent gains room to shirk or to shift risk. Because the agent's payoff function differs from the principal's, rational self-interest pushes toward actions that look acceptable on paper but erode the principal's value.

MINIMUM ACTION

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemZH · Explicit
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