Strategies To Resolve The Principal Agent Problem Accounting Essay

Strategies To Resolve The Principal Agent riddle score EssayIn general, the leading- doer business refers to difficulties of motivating one party the ingredient to act for the topper provoke of the other party the principal. In a follow, the owners of the assets (the hackneyedholder) be the principals and the managers of the phoner be the brokers. The old-hatholders of the company authorize the managers to manage and engross their resources to limit profit for the stockholders. (Kaskargonlis, I. A. 2010) The ca affair of the principal- means line is that the information asymmetry surrounded by the principal and the constituent and the principal and element micturate different absorbs. (Ulrike, L., Arleta, M) Generally, the Agents are the managers of the resources and book more information than the principals. In a company, the managers of the company leave behind have more information about the company than the stockholders of the company. The ingredients m ay use this asymmetric information to get interest for themselves rather than the principals.Figure 1, elemental Model of Principal-agent problemIn general, the principal-agent problem is the problem that the agent is non doing the scoop for the principals. The so-called principal-agent problem is really caused by the interest conflicts amid the two parties. As a principal, he or she wishes the agent to do the best for his or her interest. As an agent, he or she should do the best for the principal. However, without enough and appropriate motivations from the principal, the agent may not doing the best for the principals. If the agent is not acting for the interest of the principal, the moral hazard happens. This is the classical nonplus of principal-agent problem. In order to motivate the agent to work for the best interest of the principal, inducings should be given.Strategies to resolve the principal-agent problemMake appropriate fillip social systemThe first dodging of solving the principal-agent problem close deal be from the incentive aspect of the agent. The cause of the principal-agent problem is the motivation given to the principals. Based on the experiment of principal-agent problem, high-pitched work of the agents were observed if good compensations were given to the agents. (Ulrike Leopold-Wildburger, Arleta Mietek, 2010) thus far though the relationship between the compensation and the performance is not linear, the outputs of the agents have positive relationship with the compensation of the agents. Yuliy Sannikov (2008) advocates that the dynamic incentives play very(prenominal) signifi great dealt federal agency in the economic life. In a company, the wages of the managers and excessively the employees can affect the performance results of the company. Connecting the compensations of the agents to the performance will give incentives to the agents to do their best.In a company, the employees salaries can be connected to the p erformance results of the employees. The managers salaries can be linked to the performance of the company. In this situation, the managers of the company will have enough incentive to do their best. The stockholders of the company can also jollify the better profits of the company. One alternative solution is to give the managers of the company certain amount of corporate stocks. The income of the managers are affected by the stock prices (Bruhl, R. H. (2003). The managers will have the incentive to do the best to increase the stock price of the company. In fact, many listed companies have the so called Equity motivator Package (Bronstein, R. J. 1980).Pro and consThis strategy of solving the principal agent problem is the virtually basic one and the short-term effect can be seen immediately. Linking the agents compensation with the performance by giving the managers corporate stock is the most effective way to solving the principal agent problem. The potential drawback of this s trategy is that giving the managers stock may result in the possibility of insider trading. pronounce the performance of the agent continuouslyThe second strategy of solving the principal-agent problem is to monitor the agents behavior and evaluate the performance of the agents. I will justify this in the case of a company. In a company, the managers as the agents and the stockholders of the company are the principals. The managers behaviors are monitored by the stockholders closely in order to make sure that they are doing the best for the interest of the stockholders. In the company, the evaluation of the performance of the company is also very important. When the evaluation of the performance plays a role in determining the compensation of the employees, that is to say there is still path for the employees to improve the performance (Carl Blumstein, 2010). with the monitoring of the companys performance, the managers of the company tend to perform better.Pro and consContinuous evaluation of the performance in a company can motivate the managers continuously (Long, N., Sorger, G. 2010). Because of the continuous motivation, the performance of the company can musical accompaniment improving. This is the biggest advantage of the strategy. However, the evaluation process of the managers is a time and money consume task. The evaluation or monitoring of the agents may incur a mete out of expenses.Regulate the agent with moral standardsThe principal-agent relationship is not lonesome(prenominal) a kind of legal relationship between the principal and the agent. The principal agent problem is also a moral hazard problem (Randy, S. 2011). gibe to the basic business ethics, it is ethical for the agents to do the best to represent the interest of the principals.The first strategy of solution by building the appropriate incentive structure of the agents and the second strategy of monitoring the activities of the agents can get only short term results. In the ca pacious term, establishing the ethical awareness of representing the best interest of the stockholders can be a good choice. With a good ethical awareness, the principal and agent problem can be solved in the big term (Ruachhaus, R. W. 2009). In the case of Psychiatrists Relationships with Industry, the principal agent problems can be solved from both incentives and ethical view (Appelbaum, P. 2010). The doctors are the agents of the patients. The doctors with high moral standard will not recommend medicines of high cost to the patients unless is necessary.Pro and consThe moral standard improvement requires a long time and also needs the commitment of the employees. The moral issues in the principal agent problem can be seen clearly, but sometimes it is very difficult to distinguish. The potential advantage of this strategy is that it can achieve long term result in the company.ConclusionThe principal agent problem comes from the asymmetric information between the principal and the agent and the principal and agent have different interests. The principal hires the agent to work for him and the agent flora for the interest of the principal. Without enough motivations, principal agent problem appears. The principal agent problem is also a moral hazard problem.There are iii alternative solutions to overcome the principal agent problem. One is to give incentives to the agent. The second is to evaluate and monitor the agents activity to make sure the agent works best. The last solution is depending on the moral standards. All these three solutions have different advantages and disadvantages.