MORAL HAZARD AND ADVERSE SELECTION IN THE CONTEXT OF MAXIMIZATION OF THE PROBABILITY OF ECONOMIC SURVIVAL
Generally, the principal-agent problem can be described as delegated decisionmaking — a situation in which one economic entity (the principal) enters into an agreement (the contract) with another entity (the agent) in expectation that the agent will make decisions in the interests of the principal.
Ever since it was first for mulated this microeconomic theory has been developing apace. However, the principal-agent principle is widely applied in other economic and non-economic areas as well.
Our approach stays strictly on the microeconomic level in its narrower sense. We discuss only those common activities of the principal and the agent which are not unrepeated trade. We also restrict our analysis to the case of just one principal. That way we avoid the problem of conflicting interests of different principals — if the agent has more than one principal, each with different interests and a different relation towards risk, then even if he wants to act in the best interests of all of those principals, this is not possible to achieve.
The principal-agent microeconomic problem could refer, for example, to the relation between:
• owner and manager,
• employer and employee,
• creditor and debtor,
• firms where one firm delegates work to another (as a subcontractor or as part of a collaborative effort),
• landowner and tenant,
• litigant and counsellor,
• investor and portfolio manager,
• managing centre and subsidiary division within one company or in a centrally planned economy,
• banking supervisor and regulated bank,
• risk-averse insuree and risk-neutral insurer,
• customer (for example of a retail chain) and supplier.
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