Principal-Agent Problem
The structural conflict that arises whenever a principal (owner, shareholder, depositor, insurer) hires an agent (manager, executive, borrower, insured) to act on the principal's behalf but cannot fully observe the agent's actions. The agent has both information and discretion the principal lacks, creating moral hazard. Contract design -- performance pay, long-vesting equity, clawback provisions, deductibles, capital requirements -- attempts to re-align incentives without removing the agency relationship that creates value.
Lessons that use this term
Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
Open this term in the app → — no account needed; browse the full glossary while you research.