Agents may not act in the best interest of principals they represent.
Ross's 1973 formulation, and the reason for boards, audits, stock compensation and fiduciary duty. Every one of those instruments is a partial and costly response to the same structural gap.
In practice
- A fund manager paid on assets under management grows assets; the investors wanted returns.
- A letting agent paid per tenancy recommends more tenancies than the landlord would choose, and no one has behaved improperly.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money