agency theory

Agency theory, particularly in organizational economics, examines the relationship between a principal (like an employer or shareholder) and an agent (like an employee). It focuses on the costs and benefits associated with this relationship, especially when the agent's interests might conflict with the principal's. This theory assumes both parties act in their self-interest. Key components include the costs of monitoring the agent, the agent's bonding costs, and any residual loss from divergent interests.1

In law, agency describes a relationship where one party (the agent) is authorized to act on behalf of another (the principal) in dealings with third parties. This involves both external relations with third parties and internal duties between the principal and agent, such as care, obedience, and loyalty. The concept of agency also extends to political theory, referring to the capacity of actors to make things happen and influence outcomes.234