Principal Agent Problem
In a principal-agent problem with two principals, it is often quite difficult for the agent to perform under them if the principles' goals do not align well. I have not personally encountered such a problem in my life. However, my mother, when she was in her thirties as an entrepreneur, would deal with principal-agent problems on a day to day basis.
My mother and my father have worked along side each other ever since they graduated college, and they had a fair share of principal-agent problems that naturally came with owning businesses. During one of their businesses involving the development of educational softwares, they wanted to sell the software (in physical CDs) regionally across China. One of their sales agents, Di, was appointed to sell the CDs in a province just northeast of Beijing called Liaoning. However, Di had a cousin who was also in the education industry who desperately needed those softwares in bulk and in low wholesale prices. Therefore, instead of adhering to the contract and selling within Liaoning, Di acted in his cousin's interest and sold them in Jiangsu - where the cousin's business was. My parents' intentions of clearly dividing regions between the sales agents was to gain market coverage and ultimately hit their goal revenue through planned channels of distribution. This principal-agent conflict hindered my parents' company to reach their sales goals that year, but Di very easily met the sales numbers and earned the commission, while his cousin got high quality educational softwares at a fraction of the market price.
The most direct way avoid principal agent problems is making sure that any asymmetric information about the agent is known by the principal, like the fact that Di's cousin owned a school that needed educational softwares. However, it is quite difficult to fish out every piece of information as the agent can always choose to only disclose information that would not damage the trust. Therefore, it is vital to have a very detailed contract between the principal and the agent to make sure any breach of the agreement would result in consequences for the agent. In this particular case, Di was demoted from being a provincial sales agent to a municipal sales agent, and was fined considerably.
My mother and my father have worked along side each other ever since they graduated college, and they had a fair share of principal-agent problems that naturally came with owning businesses. During one of their businesses involving the development of educational softwares, they wanted to sell the software (in physical CDs) regionally across China. One of their sales agents, Di, was appointed to sell the CDs in a province just northeast of Beijing called Liaoning. However, Di had a cousin who was also in the education industry who desperately needed those softwares in bulk and in low wholesale prices. Therefore, instead of adhering to the contract and selling within Liaoning, Di acted in his cousin's interest and sold them in Jiangsu - where the cousin's business was. My parents' intentions of clearly dividing regions between the sales agents was to gain market coverage and ultimately hit their goal revenue through planned channels of distribution. This principal-agent conflict hindered my parents' company to reach their sales goals that year, but Di very easily met the sales numbers and earned the commission, while his cousin got high quality educational softwares at a fraction of the market price.
The most direct way avoid principal agent problems is making sure that any asymmetric information about the agent is known by the principal, like the fact that Di's cousin owned a school that needed educational softwares. However, it is quite difficult to fish out every piece of information as the agent can always choose to only disclose information that would not damage the trust. Therefore, it is vital to have a very detailed contract between the principal and the agent to make sure any breach of the agreement would result in consequences for the agent. In this particular case, Di was demoted from being a provincial sales agent to a municipal sales agent, and was fined considerably.
Detailed contracts, as you said at the end of the post, can be helpful if they can be enforced. But that requires monitoring and verification. I don't know the law in China, but in the U.S. one reason for relying on implicit contracts, as we suggested in an early Excel homework, is that contract enforcement is quite difficult and there can be substantial lags in coming to a resolution after contract breech.
ReplyDeleteI wonder in the story that you told how well your parent knew Di ahead of time. A different possible solution to the situation your parents were in would be to rely only on people whom they knew were trustworthy. Of course, that requires having previously established a good relationship with the individuals and also making sure that in the current situation the people have incentive to maintain that good relationship.
In other words, there may be multiple ways to resolve a triangle problem. The best one might depend on circumstances. But otherwise, as your example showed, the triangle problem can derail the intentions of one of the principals.