agency costs

Agency costs

The incremental costs of having an agent make decisions for a principal.

Agency Costs

Costs that arise from the inefficiency of a relationship between an agent and a principal. In a publicly-traded company, agency costs may arise because the company's executives (the agents) may act in their own interest in a way that is detrimental to shareholders (the principals). For example, they may raise their own salaries to an unrealistic level. Agency costs are best reduced by providing appropriate incentives to align the interests of both agents and principals.

agency costs

the failure of employees (as ‘agents’), hired by the owners (the ‘principals’) of a business, to fully comply with the terms and responsibilities stipulated in their CONTRACT OF EMPLOYMENT. For example, operatives may ‘shirk’, indulging in time wasting (long tea breaks etc) thus leading to a loss of potential output. The companies executive directors may fail to put shareholder interests first and pursue other BUSINESS OBJECTIVES of more ‘value’ to themselves. See PRINCIPAL-AGENT THEORY.

Strategists are concerned not only with agency costs (internal to the firm) but also with the TRANSACTION COSTS of using external markets. Together these can be important considerations in influencing the extent of VERTICAL INTEGRATION/DISINTEGRATION.