An agency cost is an economic concept that refers to the costs associated with the relationship between a "principal" (an organization, person or group of persons), and an "agent". The agent is given powers to make decisions on behalf of the principal. However, the two parties may have different incentives and the agent generally has more information. The principal cannot directly ensure that its agent is always acting in its (the principal's) best interests. This potential divergence in interests is what gives rise to agency costs. Common examples of this cost include that borne by shareholders (the principal), when corporate management (the agent) buys other companies to expand its power, or spends money on wasteful and unnecessary projects, instead of maximizing the value of the corporation's worth; or by the voters of a politician's district (the principal) when the politician (the agent) passes legislation helpful to large contributors to their campaign rather than the voters. Though effects of agency cost are present in any agency relationship, the term is most used in business contexts. Sources of the costs Professor Michael Jensen of the Harvard Business School and the late Professor William Meckling of the Simon School of Business, University of Rochester wrote an influential paper in 1976 titled "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure". Professor Jensen also wrote an important paper with Eugene Fama of University of Chicago titled "Agency Problems and Residual Claims". These works categories agency costs into three main sources: Costs borne by the principal to mitigate the problems associated with using an agent. These costs are generally referred to as monitoring costs. They may include gathering more information on what the agent is doing (e.g., the costs of producing financial statements or carrying out audits) or employing mechanisms to align the interests of the agent with those of the principal (e.g. compensating executives with equity payment such as stock options); Costs borne by the agent to build trust with their principal. These costs are referred to as bonding costs. Bonding costs may include contractually limiting the agent's decision making powers, or increasing the transparency of the agent's decision. In theory, agents will only take on bonding costs where the marginal benefit of these costs are equal to or greater than the marginal cost to the agent. Bonding costs may reduce the steps that a principal will need to take to monitor