What Is the Principal-Agent Problem?

The principal-agent problem is one that pops up all the time in our daily lives. How have you dealt with asymmetric information in the past?
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[@khary30]

2 possible solutions 1) remove the asymmetric information. The problem is they know more about cars than you and you don’t now if you can trust them or not. So instead choose mechanics who are verified as trustworthy by a 3rd party review organisation (eg trust pilot kinda sites) 2) realign the agent’s incentives. Your desire is best repair and cheapest price, his incentive may be highest price and mediocre/cheap repair. Various ways to make his incentives align with yours. 2A) get different agents to do different parts of the transaction such that no conflict of interest can occur - eg one mechanics diagnoses the car’s problems and a different one fixes them - first guy has no incentives now to over diagnose, and you’ll instantly know if the second mechanic recommends too much now. 2B) demand a warranty/ only seek mechanics who offer warranties - if their service is credibly high quality then offering a warranty isn’t costly for them; however if their service is likely to be mediocre then a warranty will be more costly for them as you’ll be more likely to actually need it.

[@leila4509]

What does a warranty mean this context? I know the definition but I have never really understood it.

[@invoker4960]

@@leila4509 in this context, warranty will help you to secure your expenses which you made to repair or to get service of a car. For an example, you repaired your brakes and Agent gave you warranty for 3 months for that breaks to be broken or not work properly. Then you will get back your money in some cases or Agent has to fix your car for free of cost.

[@gabbar51ngh]

Very succinctly said. In many ways, government runs into the principle agent problem too where it's the sole authority with not much to self check it.

[@alexcarbery8189]

I respectfully disagree. You can't just remove asymmetric information. Data uncertainty is a fact of economics and business, and bringing your vehicle to a different mechanic with more credentials doesn't change the fact that you are the other 50% of the transaction, and you still have only the information provided to you by the mechanic. The only way you can lessen the info uncertainty here is by getting mechanic training yourself and approaching the mechanic with your own plan and comparing information.

[@Tbird761]

Your third party review organization idea is subject to this same problem. In fact, that conflict has already happened with value assessments. Just look at KBB. What always happens over time is that an independent source will be purchased by and ruined, as subtly as possible, by a conflicting business interest.

[@nirvedhsutey]

I love this series

[@leemon4241]

can you please explain the effect of the principal-agent problem on the decision concerning price output and growth of the firm.

[@jameswilletts9859]

Isn't the example here really just one of assymetric information? It feels like a different set up to things like shareholder / manager relationships

[@TheBowWow14]

Thank you

[@ismikawan]

Who is principle who is agent in airline and airline tickets seller agent?

[@zaynab2954]

Ishaq Awan the Airline is the principle and ticket seller Agent :)

[@ismikawan]

zaynab who bears the risk if customers do not pay airline or agent? If agents bears the risk and they arrange the travel for the customer and hire airlines seat then ariline acting on behalf of ticket seller same as your arrange a bus for picnic

[@michaelfranklin2474]

Solution: use incentives to align the interests of the principal (car owner) and agent (mechanic)

[@ivan09182000]

okay... I think that's why my professor teach poorly and I need to watch your video to understand what Principal-Agent Problem is.

[@sandeepvk]

Ok so whats the solution - Economist please

[@khary30]

2 main solutions from my undergrad course - I added it as a new comment as kinda long haha

[@marcuscornelius3521]

Well if mechanics were just goverment employees we could just pay them a base salary and they wouldn't have any incentive to lie at all.

[@casekump9147]

I like the minecraft trailer music they got in the background

[@educationmandate2611]

we can realate this theory with politics.

[@user-qu2oh2ee9y]

14.6-051 топ 🔝

[@August1979]

Primary Versus Principal. "Contact" Doesn't Mean Source Nor "Resource". Thus a "Wizz Attempt" AIN'T Necessarily A "Crack Shot" Neither. Thus "PROBLEMS" Aint a "Concern" If Thier Is Infact a Real Need to PUT UP With the PRINCIPAL!!

[@clayjames649]

Use AI