Contractual relationships

Almost any contractual relationship, in which one party (the “agent”) promises performance to another (the “principal”), is potentially subject to an agency problem. The core of the difficulty is that, because the agent commonly has better information than does the principal about the relevant facts, the principal cannot easily assure himself that the agent’s performance is precisely what was promised. As a consequence, the agent has an incentive to act opportunistically, skimping on the quality of his performance, or even diverting to himself some of what was promised to the principal.” (Kraakman et al., The Anatomy of Corporate Law, 2017). Critically discuss the market failures that the agency problem may pose with particular attention to the phenomenon of information asymmetries.