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Principal-Agent Problem


Definition: Principal-agent problem is a particular game-theoretic description of a situation. There is a player called a principal, and one or more other players called agents with utility functions that are in some sense different from the principal's. The principal can act more effectively through the agents than directly, and must construct incentive schemes to get them to behave at least partly according to the principal's interests. The principal-agent problem is that of designing the incentive scheme. The actions of the agents may not be observable so it is not usually sufficient for the principal just to condition payment on the actions of the agents.


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