Agency cost

An agency cost is an economic concept concerning the fee to a 'principal' (an organization, person or group of persons), when the principal chooses or hires an 'agent' to act on its behalf. Because the two parties have different interests and the agent has more information, the principal cannot directly ensure that its agent is always acting in its (the principal's) best interests. An agency cost is an economic concept concerning the fee to a 'principal' (an organization, person or group of persons), when the principal chooses or hires an 'agent' to act on its behalf. Because the two parties have different interests and the agent has more information, the principal cannot directly ensure that its agent is always acting in its (the principal's) best interests. Common examples of this cost include that borne by shareholders (the principal), when corporate management (the agent) buys other companies to expand its power, or spends money on wasteful pet projects, instead of maximizing the value of the corporation's worth; or by the voters of a politician's district (the principal) when the politician (the agent) passes legislation helpful to large contributors to their campaign rather than the voters. Though effects of agency cost are present in any agency relationship, the term is most used in business contexts.