Agency theory explains the relationship between principals (e.g., shareholders) and agents (e.g., corporate executives). It focuses on resolving conflicts that arise when agents do not align with the interests of principals.
Principal-Agent Problem: A situation where there is a conflict of interest between a principal (owner) and an agent (manager).
Moral Hazard: Occurs when one party takes undue risks because they do not bear the full consequences of their actions.
Information Asymmetry: A condition where one party has more or better information than the other, leading to imbalanced decision-making.