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title: The Principal-Agent Problem
created: 2024-11-18T09:16:49
modified: 2025-08-29T08:30:45
---

* [Principal–agent problem - Wikipedia](https://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem)
	* Principal = Shareholders of the business
	* Agent = Employees of the business
* The agents (employees) are acting on behalf of the principles (shareholders).
* A conflict in priorities between the owner of an asset (Principal) and the person to whom control of the asset has been delegated (Agent).
* The challenge lies in ensuring that the Agent’s actions align with the Principal’s interests, even when the Agent has their own motivations and incentives.
* _**Designing an effective [incentive](incentives.md) scheme/model/system**_ is key.
	* “Show me the incentives – and I’ll show you the outcome.”
	* “You get what you reward for. If you have a dumb incentive, you get dumb outcomes.”
* The goal is _**to align the interests of both groups**_ and _**to remove any conflict of interests of both groups**_.
	* Key: Skin in the game (切膚之痛) = Accountability