Question

Explain the principal-agent problem as it pertains to equity contracts.

Answer 1

Principal agent problems means a problem which is arising between the principal and his agent who have been assigned by principal and authorised by principal in order to carry out certain act on behalf of principal.

when the agent works in his self interest rather than working in the interest of principal, it leads to a principal agent problem.

It is a conflict of interest which is inherent in relationship between the principal and agent when one party is expected to another best interest and this will always lead to a conflict of interest as the agent is motivated to work in his interest.