An agency cost is an economic concept concerning the ghanta cost 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 principals') 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.
Read more about Agency Cost: Sources of The Costs, Agency Costs in Corporate Governance, Agency Costs in Agricultural Contracts
Famous quotes containing the words agency and/or cost:
“It is possible that the telephone has been responsible for more business inefficiency than any other agency except laudanum.... In the old days when you wanted to get in touch with a man you wrote a note, sprinkled it with sand, and gave it to a man on horseback. It probably was delivered within half an hour, depending on how big a lunch the horse had had. But in these busy days of rush-rush-rush, it is sometimes a week before you can catch your man on the telephone.”
—Robert Benchley (1889–1945)
“The true reformer does not want time, nor money, nor coöperation, nor advice. What is time but the stuff delay is made of? And depend upon it, our virtue will not live on the interest of our money. He expects no income, but outgoes; so soon as we begin to count the cost, the cost begins. And as for advice, the information floating in the atmosphere of society is as evanescent and unserviceable to him as gossamer for clubs of Hercules.”
—Henry David Thoreau (1817–1862)