Managers' interests can diverge from owners', requiring monitoring and incentives.
Jensen and Meckling's 1976 paper, one of the most cited in economics. Its practical legacy is stock-based compensation, which solved the alignment problem and created new ones in earnings management.
In practice
- A chief executive paid in shares vesting in three years makes different decisions from one paid a salary, and neither set matches the owners' interests exactly.
- A letting agent paid on transactions recommends more transactions than a landlord would choose.