For such a big day, the brides budget can increase rapidly if they fall in love with a specific dress. However, salespeople often show the customer more expensive cars in the hope they will fall in love with one at a higher price.Īnother example can be seen in wedding dress shopping. For instance, the customer may want to buy a car for $20,000. In turn, we often see a salesperson going beyond the customers budget in a bid to get them to spend more. So they are also incentivised to make bigger sales. However, higher ticket items mean higher commissions. The majority of sales jobs are based on commission, so a salesperson is incentivised to make a sale. Often, we find that upon delivery, some goods run out of date the next day. However, the customers interests lie in obtaining foods with long dates and items that are fresh. The two parties do not align in the fact that store employees are encouraged to pick as many items as possible.

In fact, one of the companies leading investors, Warren Buffett, said it was a ‘bad deal’ and would have voted against it given the chance. What happened was the board of directors bypassed the shareholders to get the deal passed. However, Kraft’s purchase of Cadburys in 2010 avoided doing so by restructuring the acquisition through an option made available in US law. If we look at company acquisitions, shareholders generally have a right to vote. The principal agent problem arises when the interests of the CEO do not align with the shareholders. They are the agent that acts on behalf of the principal – the shareholders.

The problem then arises when the interests of the agent and the principal do not align.įor instance, the CEO of a big firm is in charge of running it. So the agent acts on behalf of the principal. In this case, the principal refers to the person who delegates authority and responsibility to the agent. The Principal Agent Problem is where there is a conflict of interest between ‘the principal’, and ‘the agent’. WRITTEN BY PAUL BOYCE | Updated 25 March 2021 What is the Principal Agent Problem?

On principal definition