Strategies To Resolve The Principal Agent Problem Accounting Essay

In general, the principal-agent job refers to troubles of actuating one party the agent to move for the best involvement of the other party the principal. In a company, the proprietors of the assets ( the shareholder ) are the principals and the directors of the company are the agents. The shareholders of the company authorise the directors to pull off and utilize their resources to do net income for the shareholders. ( Kaskarelis, I. A. 2010 ) The cause of the principal-agent job is that the information dissymmetry between the principal and the agent and the principal and agent have different involvements. ( Ulrike, L. , & A ; Arleta, M ) Generally, the Agents are the directors of the resources and hold more information than the principals. In a company, the directors of the company will hold more information about the company than the shareholders of the company. The agents may utilize this asymmetric information to acquire involvement for themselves instead than the principals.

Figure 1, Basic Model of Principal-agent job

In general, the principal-agent job is the job that the agent is non making the best for the principals. The alleged principal-agent job is truly caused by the involvement conflicts between the two parties. As a principal, he or she wishes the agent to make the best for his or her involvement. As an agent, he or she should make the best for the principal. However, without adequate and appropriate motives from the principal, the agent may non making the best for the principals. If the agent is non moving for the involvement of the principal, the moral jeopardy happens. This is the classical theoretical account of principal-agent job. In order to actuate the agent to work for the best involvement of the principal, inducements should be given.

Schemes to decide the principal-agent job

Make appropriate inducement construction

The first scheme of work outing the principal-agent job can be from the inducement facet of the agent. The cause of the principal-agent job is the motive given to the principals. Based on the experiment of principal-agent job, high public presentation of the agents were observed if good compensations were given to the agents. ( Ulrike Leopold-Wildburger, Arleta Mietek, 2010 ) Even though the relationship between the compensation and the public presentation is non additive, the end products of the agents have positive relationship with the compensation of the agents. Yuliy Sannikov ( 2008 ) advocates that the dynamic inducements play really of import function in the economic life. In a company, the rewards of the directors and besides the employees can impact the public presentation consequences of the company. Connecting the compensations of the agents to the public presentation will give inducements to the agents to make their best.

In a company, the employees ‘ wages can be connected to the public presentation consequences of the employees. The directors ‘ wages can be linked to the public presentation of the company. In this state of affairs, the directors of the company will hold plenty inducement to make their best. The shareholders of the company can besides bask the better net incomes of the company. One alternate solution is to give the directors of the company certain sum of corporate stocks. The income of the directors are affected by the stock monetary values ( Bruhl, R. H. ( 2003 ) . The directors will hold the inducement to make the best to increase the stock monetary value of the company. In fact, many listed companies have the so called Equity Incentive Package ( Bronstein, R. J. 1980 ) .

Pro and cons

This scheme of work outing the principal agent job is the most basic one and the short-run consequence can be seen instantly. Associating the agents ‘ compensation with the public presentation by giving the directors corporate stock is the most effectual manner to work outing the principal agent job. The possible drawback of this scheme is that giving the directors stock may ensue in the possibility of insider trading.

Measure the public presentation of the agent continuously

The 2nd scheme of work outing the principal-agent job is to supervise the agents ‘ behaviour and measure the public presentation of the agents. I will explicate this in the instance of a company. In a company, the directors as the agents and the shareholders of the company are the principals. The directors ‘ behaviours are monitored by the shareholders closely in order to do certain that they are making the best for the involvement of the shareholders. In the company, the rating of the public presentation of the company is besides really of import. When the rating of the public presentation plays a function in finding the compensation of the employees, that is to state there is still room for the employees to better the public presentation ( Carl Blumstein, 2010 ) . with the monitoring of the company ‘s public presentation, the directors of the company tend to execute better.

Pro and cons

Continuous rating of the public presentation in a company can actuate the directors continuously ( Long, N. , & A ; Sorger, G. 2010 ) . Because of the uninterrupted motive, the public presentation of the company can maintain improving. This is the biggest advantage of the scheme. However, the rating procedure of the directors is a clip and money devouring undertaking. The rating or monitoring of the agents may incur a batch of disbursals.

Regulate the agent with moral criterions

The principal-agent relationship is non merely a sort of legal relationship between the principal and the agent. The chief agent job is besides a moral jeopardy job ( Randy, S. 2011 ) . Harmonizing to the basic concern moralss, it is ethical for the agents to make the best to stand for the involvement of the principals.

The first scheme of solution by constructing the appropriate inducement construction of the agents and the 2nd scheme of supervising the activities of the agents can acquire merely short term consequences. In the long term, set uping the ethical consciousness of stand foring the best involvement of the shareholders can be a good pick. With a good ethical consciousness, the principal and agent job can be solved in the long term ( Ruachhaus, R. W. 2009 ) . In the instance of Psychiatrists ‘ Relationships with Industry, the chief agent jobs can be solved from both inducements and ethical position ( Appelbaum, P. 2010 ) . The physicians are the agents of the patients. The physicians with high moral criterion will non urge medical specialties of high cost to the patients unless is necessary.

Pro and cons

The moral criterion betterment requires a long clip and besides needs the committedness of the employees. The moral issues in the chief agent job can be seen clearly, but sometimes it is really hard to separate. The possible advantage of this scheme is that it can accomplish long term consequence in the company.

Decision

The chief agent job comes from the asymmetric information between the principal and the agent and the principal and agent have different involvements. The chief hires the agent to work for him and the agent works for the involvement of the principal. Without adequate motives, chief agent job appears. The chief agent job is besides a moral jeopardy job.

There are three alternate solutions to get the better of the chief agent job. One is to give inducements to the agent. The 2nd is to measure and supervise the agent ‘s activity to do certain the agent works best. The last solution is depending on the moral criterions. All these three solutions have different advantages and disadvantages.

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