Character of principal: Agent problem in corporate setting

Abstract

Problems of conflict, motivation and motive are traditionally studied by social psychology and rational choice theory. One can decide whether to cooperate with others. In other case, person will act independently. When people decide to cooperate, they start a specific social interaction, known as a game. That game is familiar with a phenomenon named principal - agent problem. The core of this problem is linked to gradual drift between motives of principal and agent. Over time, agent will stop working for the principal's interest. Principal and agent roles are found in all systems with hierarchy and in social relations that incorporate specific positions in which one person delegates tasks to another. Principal also controls, evaluates and rewards agents' performance. From a power of rewarding perspective, relationship between principal and agent is particularly interesting in corporate sector, given its meritocratic nature. Besides that, disproportion in power of information is present as well. This type of power works in favor of the agent. We find this to be the center of the principal - agent problem. Like similar conflicts, this one can be resolved either by compromise, state of silent conflict, or by termination of cooperation. Principal - agent problem is specific in the social aspect of spillover effect where second-order participants are affected by two person conflict. False consensus effect and future discounting that shape principal - agent problem represent cognitive distorsion influenced by social perception, with function to satisfy basic motives.