The Principal Agent Problem

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In the principal agent problem, a party (the agent) is appointed to act on the behalf of another party (principal), however when the incentives of both parties are not perfectly aligned, in other words, when the agent’s interests differ from the principal’s a problem becomes present. The agent would become more likely to act in his or her own interests, rather than the interests of the principal. Principal agent problem allows us to see who has the power in certain circumstances, in which there is an individual that is in a position of power in a certain branch of the government. With the principal agent problem, we can see that, people in positions of power can use the benefits of such positions to pursue their own agendas, and use the power of the government to benefit themselves rather than benefitting the society. An example for the principal agent problem would be, a politician who gets away with corruption, such as embezzlement, during his or her time in the office. This becomes possible because in certain situations it can turn out to be too costly for the voters to take part in actions towards removing the politician from office. In the above example, the politician would be the agent, as he is the one with power, that is …show more content…

Some obvious examples for collective action problems are, the prisoners dilemma, and tragedy of commons. In prisoners dilemma, supposing there are 2 prisoners, both have the option to confess, or keep silent. No matter what the other prisoner does, both can individually improve their own position by confessing. If the other confesses, then one had better do the same to avoid a harsh sentence. Confession is the best option for each, if only one of them do so. But if both of them confess, the outcome becomes worse for both prisoners, than it would have been if they kept

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