Question

One of the topics we're focusing on this week is the Principal-Agent problem, or how when you hire someone to work for you (such as an owner hiring a manager or a manager hiring an employee) the incentives of the agent are often not the same as the principal, which may cause them to "misbehave" or "cheat" the system.

For your first post in this discussion, think of and share an example of when you saw or experienced something like this happening. When someone was supposed to do something (the agent), but because their incentives were different from those of the person that assigned them the task (the principal), it didn't go the way they wanted.

After posting your example, for your second post, come back and respond to a classmate suggesting a way that you could have aligned the incentives of the agent with those of the principal. That is, could you have structured things different so that the agent had an incentive to do what the principal wanted.

Answer 1

The example- I once wanted to get something valuable from a place around 200 miles away. I didnt trust courier services so wanted someone known to me go there and get it. Fortunately a friend of mine wanted to visit a religious place which was nearby to the place where the valuable thing was. So I provided him with my car and asked him to get what I needed while also visiting the religious place.
It turned out that while he did get the item, he also went further along to 3 more places and spent far more on fuel than what I thought would be the cost. He also drove the car very roughly and I ended up spending some more money on repairs.

This is an example of principal agent problem because the principal (me) had a set amount of cost in mind but the agent (the friend) had his own agenda and went to fulfil that rather than prioritizing what I wanted- resulting in far higher cost for me.

Will need the other classmate's response to answer the next part of the question.