In general, the principal-agent problem identifies problems of motivating one party the agent to do something for the best interest of the other party the principal. Inside a company, the owners of the investments (the stockholder) are the principals and the professionals of the business are the brokers. The stockholders of the company authorize the managers to control and use their resources to make earnings for the stockholders. (Kaskarelis, I. A. 2010) The cause of the principal-agent problem is that the info asymmetry between the main and the agent and the main and agent have different interests. (Ulrike, L. , & Arleta, M) Generally, the Providers are the managers of the resources and also have more info than the principals. Inside a company, the professionals of the business will have more information about the business than the stockholders of the business. The agents may use this asymmetric information to get interest for themselves as opposed to the principals.
Figure 1, Basic Model of Principal-agent problem
In standard, the principal-agent problem is the condition that the agent is not doing the best for the principals. The so-called principal-agent problem is very caused by the eye conflicts between your two parties. As a principal, he or she would like the agent to do the best for interest. As a realtor, she or he should do the best for the main. However, without enough and appropriate motivations from the main, the agent might not doing the best for the principals. If the agent is not performing for the eye of the principal, the moral risk happens. This is actually the classical model of principal-agent problem. In order to encourage the agent to work for the best interest of the principal, incentives should get.
The first strategy of dealing with the principal-agent problem can be from the incentive aspect of the agent. The reason for the principal-agent problem is the motivation given to the principals. Predicated on the experiment of principal-agent problem, powerful of the agents were discovered if good compensations received to the realtors. (Ulrike Leopold-Wildburger, Arleta Mietek, 2010) Despite the fact that the relationship between the reimbursement and the performance is not linear, the outputs of the realtors have positive relationship with the settlement of the agencies. Yuliy Sannikov (2008) advocates that the active incentives play very important role in the monetary life. Inside a company, the wages of the professionals as well as the employees can affect the performance results of the business. Connecting the compensations of the realtors to the performance will give bonuses to the agents to do their finest.
In an organization, the employees' incomes can be connected to the performance results of the employees. The managers' incomes can be from the performance of the business. In this situation, the managers of the business will have enough motivation to do their best. The stockholders of the company can also benefit from the better profits of the company. One alternative solution is to give the managers of the company certain amount of corporate stocks. The income of the managers are affected by the stock prices (Bruhl, R. H. (2003). The managers will contain the motivation to do the best to improve the stock price of the company. In fact, many outlined companies possess the so called Equity Incentive Program (Bronstein, R. J. 1980).
This strategy of dealing with the main agent problem is the most basic one and the short-term result is seen immediately. Linking the brokers' payment with the performance giving the managers commercial stock is the simplest way to solving the main agent problem. The actual drawback of the strategy is the fact that giving the managers stock may bring about the opportunity of insider trading.
The second strategy of handling the principal-agent problem is to keep an eye on the brokers' behavior and evaluate the performance of the real estate agents. I will discuss this in the case of a company. In a very company, the managers as the providers and the stockholders of the company will be the principals. The managers' behaviors are supervised by the stockholders directly in order to make certain they are doing the best for the eye of the stockholders. In the business, the evaluation of the performance of the business is also very important. If the analysis of the performance plays a role in determining the compensation of the employees, that is to say there is still room for the employees to increase the performance (Carl Blumstein, 2010). with the monitoring of the company's performance, the managers of the business tend to perform better.
Continuous evaluation of the performance in an organization can stimulate the managers constantly (Long, N. , & Sorger, G. 2010). Due to the continuous desire, the performance of the business can keep increasing. This is the biggest advantage of the strategy. However, the evaluation process of the managers is a time and money eating task. The evaluation or monitoring of the agencies may incur a whole lot of expenditures.
The principal-agent romantic relationship isn't just some sort of legal relationship between your principal and the agent. The principal agent problem is also a moral risk problem (Randy, S. 2011). According to the basic business ethics, it is honest for the brokers to do the better to represent the eye of the principals.
The first strategy of solution by building the appropriate incentive structure of the real estate agents and the second strategy of monitoring the actions of the brokers can get only short term results. In the long run, establishing the moral knowing of representing the best interest of the stockholders can be a good choice. With a good moral awareness, the principal and agent problem can be fixed in the permanent (Ruachhaus, R. W. 2009). Regarding Psychiatrists' Human relationships with Industry, the main agent problems can be solved from both bonuses and ethical view (Appelbaum, P. 2010). The doctors are the agencies of the patients. The doctors with high moral standard won't recommend medicines of high cost to the patients unless is essential.
The moral standard improvement requires a long time and also needs the dedication of the employees. The moral issues in the main agent problem can be seen clearly, but sometimes it is very difficult to distinguish. The potential benefit of this strategy is the fact that it can perform long term bring about the business.
The principal agent problem originates from the asymmetric information between the primary and the agent and the main and agent have different passions. The main hires the agent to work for him and the agent works for the interest of the principal. Without enough motivations, primary agent problem shows up. The main agent problem is also a moral risk problem.
There are three different solutions to conquer the principal agent problem. Is to give bonuses to the agent. The second reason is to judge and screen the agent's activity to make sure the agent works best. The last solution is depending on moral standards. All these three solutions have different benefits and drawbacks.