Week 13

 1.) The agency problem happens when a principal hires an agent to work on their behalf, but the agent also has their own personal interests and goals. Because of this, the agent may make decisions that benefit themselves instead of fully benefiting the principal. This might create conflict involving things like money, trust, and decision-making. An agent might take a deal on behalf of the principal that will give them the most amount of money if they are given a percentage, even though it might not be the best deal for the principal. 

2.) One example of the agency problem outside of real estate is between a client and a lawyer. The client could hire the lawyer to negotiate and represent them, but the lawyer may have interests that are different. If the lawyer is being paid by the hour, they may spend more time than they might need on the case because they will get paid more instead of trying to solve the problem quickly and cheaply. One way to manage this conflict is to use a fixed fee or performance-based system so that the lawyer has more motivation and money to work quickly. 

Another example is between a company and its employees. The company acts as the principal, while employees are agents working on behalf of the business. A conflict can happen because employees might not always work as hard as their employers, since the employees still get paid either way. The reading explains that companies sometimes manage this problem through monitoring systems and have things like bonuses, commissions, and productivity-based pay that will encourage them to work harder for the company. 

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