Agency costs

An agency cost is an economic concept that refers to the costs associated with the relationship between a “principal” (an organization, person or group of persons), and an “agent” [Principle-agent problem]. The agent is given powers to make decisions on behalf of the principal. However, the two parties may have different incentives [Incentives] and the agent generally has more information. The principal cannot directly ensure that its agent is always acting in its (the principal’s) best interests. This potential divergence in interests is what gives rise to agency costs.

(“Agency Cost” 2022)

Types

• Monitoring costs
• Bonding costs
• Residual costs

Bibliography

Backlinks

• Principle-agent problem