principal-agent relationship

Definition

The arrangement that exists when one person or entity (called the agent) acts on behalf of another (called the principal). For example, shareholders of a company (principals) elect management (agents) to act on their behalf, and investors (principals) choose fund managers (agents) to manage their assets. This arrangement works well when the agent is an expert at making the necessary decisions, but doesn't work well when the interests of the principal and agent differ substantially. In general, a contract is used to specify the terms of a principal-agent relationship.

Use this term in a sentence

The principal-agent relationship is very beneficial to the principal when the agent is an expert in their field and can provide additional knowledge and insight.

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