Principal-agent Relationship and Agency Problem

Abstract

Progressively stricter requirements of labor division have led to the blossom of the principal-agent model, where differences in objective functions between the principal and the agent, as well as information asymmetry, often hinder the principal from maximizing their utility and can result in potential harm to both parties and social welfare. This paper aims to analyze the endogenous causes and issues resulting from the principal-agent model and proposes solutions. Additionally, the shareholder-CEO relationship in finance is applied as a specific case of the principal-agent model for further analysis. Through the construct of a simple model and a signaling mechanism pondering more realistic elements, the negative effect of information asymmetry can be weakened. Lastly, based on the findings of this paper and existing empirical research, the article proposes specific schemes for the above-mentioned mechanism and discusses their implementation and implications. The investigation of principal-agent issues and the proposal of appropriate countermeasures are of great significance and are always frontier concerns for both academia and society.