Agency Problems are ubiquitous in the Economics of Management. Describe why this is the case? Illustrate how control structures might be devised to address these difficulties?

In order to answer this question I will first outline what agency problems refer to. I will then explain why they are so commonplace in the world of business. This will be followed by possible solutions on how to deal with these issues.

When one party hires another in order to carry out decisions, which will have an effect on their return or income, a principal – agent relationship is created. The principal hires the agent to work on their behalf. The most common example of this in a business management context is the relationship between Shareholders (the principal) and Managers (the agent). However principal agent relationships appear in many other contexts as well such as insurance. In the case of shareholders and managers, it is the managers who make the decisions despite the shareholders actually owning the company. There is thus a separation of ownership and control. Of course the shareholders expect the managers to act in their best interests but the managers may have their...