Solutions to Principal-Agent Problems in Firms
There are many settings in which one economic actor (the principal) delegates authority to an agent to act on her behalf. The primary reason for doing so is that the agent has an advantage in terms of expertise or information. This informational advantage, or information asymmetry, poses a problem for the principal—how can the principal be sure that the agent has in fact acted in her best interests? Can a contract be written defining incentives in such a way that the principal can be assured that the agent is taking just the action that she would take, had she the information available to the agent?