Game Analysis between Principal and Agent under Principal-Agency Relationship

Abstract

The problem that principal can effectively supervise the agent has not been solved. Based on principal-agent relationship, mathematical game model is constructed and backward induction method in game theory is used to obtain the equilibrium between the principal and agent. Discussion of the equilibrium solution will reveal some features of the principals about monitoring behavior. The supervision of the principal will be increased with the strength of institutional constraints. When the institutional constraints are complete, principal will choose complete supervision to the agent. But when the institutional constraints are not fully complete, the principal's supervision is not entirely complete. The principal and agent tend to choose collusion to some extent. Therefore, certain measures should be taken to improve the supervision motive from principal and reduce the degree of collusion.