Principal agent theory

Topics: Principal-agent problem, Voting, Elections Pages: 3 (679 words) Published: October 28, 2013
Separating Theory from Practice
By: Coretta Hudson
Capella University

Principal-agent problem is a particular game-theoretic description of a situation. There is a player called a principal, and one or more other players called agents with utility functions that are in some sense different from the principal's. The principal can act more effectively through the agents than directly, and must construct incentive schemes to get them to behave at least partly according to the principal's interests. The principal-agent problem is that of designing the incentive scheme. The actions of the agents may not be observable so it is not usually sufficient for the principal just to condition payment on the actions of the agents.

Principal- Agent theory (PAT) was developed in the field of economics in the 1970s to understand the prevailing problems that appear every time Person A (the “principal”) asks Person B (the “agent”) to do something on his or her behalf for a given price. The basic assumption of PAT is the existence of a double asymmetry between the principal and the agent, since they have different preferences (e.g., the customer/principal wants healthy teeth, while the dentist/agent wants to receive good pay (Bertrand, Berg-Schlosser & Morlino, 2011).

John Jack tried to speak to someone at the company about the situation but no one listened to his warnings. John Jack then reported the situation to the Navy

Discuss how and why the theory applies to the whistleblower’s story. In doing so, discuss specific information from the video and how it relates or applies to the theory.

The principal-agent theory is quite applicable to an analysis of poll site voting Election Day. In this analysis, the election administrator is the principal working with a large number of agents throughout the election process (Alvarez & Hall, 2006). The poll workers are not certified, and are not required to have a degree to...
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