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Principal Agent Problem

An agent is someone who is authorised and agrees to act (i.e. make decisions) on behalf of someone else. For example, in a commercial business, an agent might be the manager of a store.

The principal-agent problem exists when one person (i.e. the agent) is able to make decisions on behalf of another person (i.e. the principal), but the principal is unable to adequately supervise the agent. This can result in the agent acting in his/her own best interests rather than the interests of the principal.

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