What is agency theory?

The agency theory is defined as that situation in which an agent or a person has been sued to carry out an activity or work on behalf of a company or person, the latter being the main applicant for said work. Therefore, to understand the concept of agency theory, it is important that we bear in mind that what the company or principal has done is delegate an activity, function or work to a third party, who will be the agent.

What are the characteristics of the agency theory?

One of the characteristics of the agency theory is that everything always depends on a subcontracting system. However, this does not suppose any illegality, since it is lawful to have the services of a third party. In fact, one of the advantages of the agency theory is that the principal or applicant company can achieve better results if it has the help of an expert in the development of its activity. Other features of the agency theory are as follows:

  • In the theory of the agency, two parties work and each one of them seeks a common benefit, so that if one succeeds, the other probably does too.
  • In all agency theory, economic conditions prevail that are established prior to the development of the activity. Therefore, the agency theory will only work properly through business agreements.
  • For the agency theory to work, it is important that both parties know how to deal equally with the conflicts that may arise, since it is something common and essential for the economic development of the agency.
  • The agency theory allows you to work efficiently because it is flexible in terms of business organization.

What are the disadvantages of agency theory?

Like any development of activity, given what this theory implies, there are some drawbacks that the agency theory has, and among them we find one mainly and that is the difference of interests. In order for the agreement between the two parties to work, it is important that we always walk under the same direction, since the first moment we find ourselves with a division of interests, the objectives will be at risk.

In addition, in these cases the production costs increase and they do so for something as simple as the agreement itself, not even for later problems, but for the simple fact of resorting to the services or hiring another person. For this reason, it is so important that the agency and principal define the objectives so that the agency theory comes out ahead and works correctly. In fact, the first moment that one of the two parties leaves the set objectives, the employment relationship is in danger.

Therefore, before making a decision to fix this theory of the agency, it is necessary to define the objectives well and make a feasibility study to determine whether or not it may work and assess everything in detail.

Leave a Comment