Principal-agent theory provides definitive answers to how ownership Essay - 1

Principal-agent theory provides definitive answers to how ownership and control problems should be overcome in particular firms. Discuss - Essay Example As a result of globalization, managing business is considered as a complex situation wherein the business owners should continuously develop strategic ways that can enable the company survive the internal and external business challenges. In relation to the use of principal-agent theory, this study will provide some strategic ways on how ownership and control problems should be overcome. As part of going through the main discussion, some real-life case situations will be analyzed using the principal-agent theory framework. In relation to the principal-agent framework, the agent is pertaining to the person who is offering a product or service whereas the principal is the one who pays a certain amount of money in exchange for a product or service. In line with this, the concept of principal-agent theory can also be applied in the case of a landlord (agent) and the tenant (principal) who pays rent and electricity as stipulated in the agreement contract between the landlord and the tenant The principal and the agent may or may not have complete information with regards to the future development of their business relationship. As explained by Rasmusen (2007, p. 179), the presence of moral hazard which is normally hidden by nature is a common cause of misunderstanding between the principal and the agent. In line with this, a common principal-agent problem that may arise between the landlord and the tenant is the payment for unsettled rent, electricity bills and damages that may occur inside the house. Depending on the preferred mode of payment as demanded by the landlord, the landlord can prevent the risk wherein the tenant could fail to pay the due amount of rent, damages and electricity bills by obliging the tenant to pay the amount of two months deposit plus the monthly rental fees. On the part of the tenant who is paying for the rent, the principal is more likely to demand for good quality house that is free from termites, non-functioning