what is the principal agent problem 
the principal agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf an agent may act in a way that is contrary to the best interests of the principal the principal agent problem is as varied as the possible roles of a principal and agent it can occur in any situation in which the ownership of an asset or a principal delegates direct control over that asset to another party or agent understanding the principal agent problemthe principal agent problem has become a standard factor in political science and economics the theory was developed in the 1970s by michael jensen of harvard business school and william meckling of the university of rochester in a paper published in 1976 they outlined a theory of an ownership structure designed to avoid what they defined as agency cost and its cause which they identified as the separation of ownership and control this separation of control occurs when a principal hires an agent the principal delegates a degree of control and the right to make decisions to the agent but the principal retains ownership of the assets and the liability for any losses for example a company s stock investors as part owners are principals who rely on the company s chief executive officer ceo as their agent to carry out a strategy in their best interests that is they want the stock to increase in price or pay a dividend or both if the ceo opts instead to plow all the profits into expansion or pay big bonuses to managers the principals may feel they have been let down by their agent there are a number of remedies for the principal agent problem and many of them involve clarifying expectations and monitoring results the principal is generally the only party who can or will correct the problem 