Principal-agent problem

Many economic activities involve the use of agents: selling a house, for example. But the risk is that the interests of the principal and the agents are not exactly aligned; and the agents are likely to be better informed than the principal. When shareholders hire managers to run a company, the latter may focus on increasing their salaries, or their perks, rather than maximising the returns of investors. See also agency costs and asymmetric information, and, for more detail, our Schools Brief.