A theory of agency law

Abstract

Despite the ubiquity of agents in the modern world, agency law does not have a coherent explanation or unified theory. The Restatement (Third) of Agency updates and attempts to explain the law, but its explanations are limited in scope and at times unpersuasive. Like other contemporary commentary on agency law, the Third Restatement draws from contract and tort theory, an approach which ignores the unique features of agency law. Agency law enables principals to act through agents; it also ensures that principals using agents do not thereby escape liability or other consequences of their choices. This paper develops a theory to fit agency law. The "costbenefit internalization theory" is based on the simple premise that the principal, who has chosen to conduct her business through an agent, must bear the foreseeable consequences of that choice. Conversely, as the bearer of the risks, the principal is entitled to receive the benefits created by the agency relationship. The cost-benefit internalization theory explains and illuminates virtually all agency law doctrine.