Summary of Chapter 9
Chapter 9 deals with agency and games theory as well as moral hazards.
Game theory is a theoretical framework to conceive social situations among competing players and
produce optimal decision-making of independent and competing actors in a strategic setting.
Using game theory, real-world scenarios for such situations as pricing competition and product
releases (and many more) can be laid out and their outcomes predicted.
Agency theory however is a principle that is used to explain and resolve issues in the relationship
between business principals and their agents. Most commonly, that relationship is the one between
shareholders, as principals, and company executives, as agents.
Agency theory attempts to explain resolve disputes over priorities between principals and
their agents.
Resolving the differences in expectations is called "reducing agency loss."
Performance-based compensation is one way that is used to achieve a balance between
principal and agent.
An agency, in broad terms, is any relationship between two parties in which one, the agent, represents
the other, the principal, in day-to-day transactions. The principal or principals have hired the agent to
perform a service on their behalf.
Principals delegate decision-making authority to agents. Because many decisions that affect the
principal financially are made by the agent, differences of opinion and even differences in priorities
and interests can arise. This is sometimes referred to as the principal-agent problem.
By definition, an agent is using the resources of a principal. The principal has entrusted money but
has little or no day-to-day input. The agent is the decision-maker but is incurring little or no risk
because any losses will be borne by the principal.
Chapter 9 deals with agency and games theory as well as moral hazards.
Game theory is a theoretical framework to conceive social situations among competing players and
produce optimal decision-making of independent and competing actors in a strategic setting.
Using game theory, real-world scenarios for such situations as pricing competition and product
releases (and many more) can be laid out and their outcomes predicted.
Agency theory however is a principle that is used to explain and resolve issues in the relationship
between business principals and their agents. Most commonly, that relationship is the one between
shareholders, as principals, and company executives, as agents.
Agency theory attempts to explain resolve disputes over priorities between principals and
their agents.
Resolving the differences in expectations is called "reducing agency loss."
Performance-based compensation is one way that is used to achieve a balance between
principal and agent.
An agency, in broad terms, is any relationship between two parties in which one, the agent, represents
the other, the principal, in day-to-day transactions. The principal or principals have hired the agent to
perform a service on their behalf.
Principals delegate decision-making authority to agents. Because many decisions that affect the
principal financially are made by the agent, differences of opinion and even differences in priorities
and interests can arise. This is sometimes referred to as the principal-agent problem.
By definition, an agent is using the resources of a principal. The principal has entrusted money but
has little or no day-to-day input. The agent is the decision-maker but is incurring little or no risk
because any losses will be borne by the principal.
