The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Principal and Agent (ii)

  • Joseph E. Stiglitz
Reference work entry


The principal–agent literature is concerned with how the principal (say an employer) can design a compensation system (a contract) which motivates another individual, his agent (say the employee), to act in the principal’s interests. A principal–agent problem arises when there is imperfect information concerning what action the agent either has undertaken or should undertake. It arises in insurance and credit relationships because of their intertemporal nature, when it is known as ‘moral hazard’. It also arises where opportunities exist for the principal to extract as much rent as possible from the agent.


Asymmetric information Compensation Competitive equilibrium Credit Employer– employee relationship Implicit contracts Individual rationality constraints Insurance Intertemporal relationships Mirrlees, J. Moral hazard Optimal taxation structures Pareto efficient tax structures Partially discriminating monopoly Pooling equilibrium Principal and agent (ii) Rent seeking Reservation utility constraint Risk Risk sharing Ross, S Separating equilibrium Sharecropping Stiglitz, J. E 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Joseph E. Stiglitz
    • 1
  1. 1.