What is Agency Problem?

 A conflict of interest arising between creditors, shareholders and management because of differing goals. For example, an agency problem exists when management and stockholders have conflicting ideas on how the company should be run. The agency problem also refers to simple disagreement between agents and principals.

The two most common agency problems are "adverse selection" and "moral hazard."// The solution (which is closely related to the moral hazard problem) is to ensure the provision of appropriate incentives so that agents act in the way principals wish them to. Even in the limited arena of employment contracts, the difficulty of doing this in practice is reflected in a multitude of compensation mechanisms and supervisory schemes.