Explain the principal agent theory in negotiation.

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Expert Solution

The principal-agent theory revolves around the two factors namely agent, the person who acts on behalf of the firm also called as Principal.

This theory states that many times the conflict of interest happens between the best interest of principal and the agent. This problem is commonly known as Agency problem.

Example for this problem can be when you are negotiating a deal with the agent of a firm (principal) and you think whether the person can be trusted. The theory explains that the person can not be trusted.

The dilemma occurs when the agents are motivated to perform the act of their own interest.

For example, a person who has come to sell you a life insurance cannot be trusted (as per the theory) as he has the pressure of his sales targets achievement and also earning monetary incentives. In order to sell the product as fast as possible. He'll only showcase you the good side of the product even if the product does not suit you.

keosha answered 2 months ago

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