Principal–Agent Problem

Overview

One party (the principal) delegates to another (the agent) whose interests differ and whose actions can't be fully observed — producing agency cost: monitoring spend + agent bonding spend + residual loss. Formalized by Jensen & Meckling (1976). Structure produces the behavior, not character — so the fix is structural.

Composes with signaling-games, repeated-games-reputation, prisoners-dilemma, and okr-goal-setting.

When to Use

• Board reviewing executive compensation; outsourcing or contractor decisions
• Employees/executives behaving in ways that puzzle leadership
• New joint venture, LP-GP fund, or platform marketplace being structured
• Someone says "agency cost," "moral hazard," "skin in the game," "fiduciary duty"
• Deploying an autonomous AI agent, sizing AI capex/adoption, or facing AI-native competition where you delegate to a system whose objective and actions you can't fully observe (alignment / guardrails / human-in-the-loop)

Not when: fully aligned interests + fully observable behavior; contract design cost exceeds the agency cost it would prevent.

Coaching Novices (Adaptive Front Door)