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Agency Theory

Agency theory examines the relationship between principals and agents, highlighting conflicts of interest that arise when decision-making authority is delegated. It emphasizes that agents may act in self-interest, which can lead to misalignment with the principals' goals, impacting fields like finance and management. Understanding these dynamics allows organizations to develop strategies that align interests and improve governance.

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21 views3 pages

Agency Theory

Agency theory examines the relationship between principals and agents, highlighting conflicts of interest that arise when decision-making authority is delegated. It emphasizes that agents may act in self-interest, which can lead to misalignment with the principals' goals, impacting fields like finance and management. Understanding these dynamics allows organizations to develop strategies that align interests and improve governance.

Uploaded by

khenverlee6
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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AGENCY THEORY

Introduction

Agency theory is a fundamental concept in economics and organizational


management that explores the relationship between principals and agents. This theory
addresses issues that arise when one party (the principal) delegates decision-making authority
to another party (the agent). It seeks to explain the conflicts of interest that can occur in these
relationships,
particularly when the goals of the principal and agent are not aligned.

1
Body

At its core, agency theory posits that agents are often motivated by self-interest, which
may lead to actions that are not in the best interest of the principals. Agency theory has
significant implications in various fields, including finance, management, and political science. In
corporate governance, for instance, it informs practices to enhance accountability and
performance. The ultimate goal is to create a framework where both principals and agents can
achieve their objectives without detrimental conflict.

Conclusion

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In conclusion, agency theory provides valuable insights into the complexities of
relationships in organizational settings. By understanding the dynamics of agency relationships
and the potential for conflict, organizations can develop strategies to align interests and
reduce agency costs, ultimately fostering better governance and performance.

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