Briefly, agency theory is a conceptual framework that evolved out of the field of economics, and provides a lens for viewing contractual relationships either within an organization or on behalf of an organization. Focusing heavily on information and incentives, it serves as an effective framework in instances where imperfect contracts allow for ambiguity, uncertainty, or miscommunication.
Agency theory concerns itself with the delegation relationship between a principal and its agent, and relies heavily on assessing the information and incentives that are available to both parties. A principal can be thought of as one who enters into a contractual relationship with an agent in order to complete certain tasks or accomplish certain goals. An agent can be defined as the entity that is “entrusted to take actions that lead to outcomes specified by the principal” (Gormley & Balla, 2004, p. 54).
Agency theory contends that problems will arise within contracting relationships whenever a principal and its agent possess different levels of information, and are responding to different incentives. Because agency theory assumes that principals and agents act in their own self-interest, agents have incentive to pursue their own interests rather than those more closely aligned with their principal’s (Moe, 1984; Perrow, 1986). When this occurs, problems can arise.
Reference:
http://lawaspect.com
Agency theory contends that problems will arise within contracting relationships whenever a principal and its agent possess different levels of information, and are responding to different incentives. Because agency theory assumes that principals and agents act in their own self-interest, agents have incentive to pursue their own interests rather than those more closely aligned with their principal’s (Moe, 1984; Perrow, 1986). When this occurs, problems can arise.
Reference:
http://lawaspect.com
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