Agency theory is a theory in organizational economics and corporate governance that examines the relationship between a principal, such as a company's shareholders, and an agent, such as its managers, who is engaged to act on the principal's behalf but may have different interests and access to different information. The theory analyzes the agency costs that arise from this misalignment, including the costs of monitoring managers, the costs of structuring incentives such as executive compensation to align managerial and shareholder interests, and the residual losses that remain even after such mechanisms are in place. Agency theory has been highly influential in corporate governance research and practice, shaping debates over executive pay, board oversight, and the design of incentive contracts.
Facts
Disputed
Origin YearWikipedia names Jensen and Meckling's October 1976 paper as the most cited reference for the theory, while also stating there is contention over origination between Stephen Ross and Barry Mitnick. Core ClaimAgency theory addresses the conflict in interests and priorities that arises when an agent takes actions on behalf of a principal, especially under asymmetric information between the two. 1 Cross-Tradition Connections
Associated With
Agency theory and stakeholder theory are the standard contrasting theories of corporate purpose and governance, routinely paired in the literature.
Transaction cost economics and agency theory are sibling theories of the firm within New Institutional Economics.
Sources
1. Wikipedia, Agency Theory
WikipediaWikipedia, Principal-agent problem lead sectionQuote, Wikipedia, Principal-agent problem lead section
The principal–agent problem (often abbreviated agency problem) refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the "principal").
1. Wikipedia, Agency Theory
WikipediaWikipedia, Principal-agent problem, references sectionQuote, Wikipedia, Principal-agent problem, references section
Jensen, Michael C.; Meckling, William H. (October 1976). "Theory of the firm: Managerial behavior, agency costs and ownership structure"
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