The Principal/Agent Problem

This text discusses the principal/agent problem, which occurs when an agent has a conflict of interest with the principal they are representing. This can happen in a variety of situations, such as when a stockbroker is representing an investor or a doctor is representing a patient.

The principal must have some knowledge and information regarding the agent’s behavior, but this is not always possible in a complex world. In these cases, a code of conduct or code of ethics can be used to help ensure that the agent acts in the principal’s best interests.

Questions

• What is the principal/agent problem?
• What are some examples of the principal/agent problem?
• How can codes of conduct and ethics help to resolve conflicts between principals and agents?

Answers

• The principal/agent problem occurs when an agent has a conflict of interest with the principal they are representing.
• Some examples of the principal/agent problem include:
  * A stockbroker who maximizes their commission at the expense of the investor’s earnings.
  * A doctor who prescribes unnecessary medication to increase their profits.
  * A lawyer who fails to provide adequate representation to their client in order to save time.
• Codes of conduct and ethics can help to resolve conflicts between principals and agents by providing a set of guidelines that the agent must follow. These guidelines can help to ensure that the agent acts in the principal’s best interests, even if there is a conflict of interest.