Canonical · Systems & Incentives · Paper

Principal–Agent Problem

Michael Jensen & William Meckling · 1976

"The one deciding is rarely the one bearing the consequences."

The idea

A principal hires an agent to act on their behalf — shareholders hire executives, homeowners hire contractors, citizens elect officials. The agent has more information and different incentives, so their decisions systematically diverge from what the principal would choose. Every institution runs on layers of this.

Why it works

The takeaway — recall it first

The French Garden and the English Garden

"New systems are usually built like French formal gardens — a geometry imposed from above that flattens whatever was already there — when they could instead be built like English landscape gardens, which study the existing terrain and work with what's already load-bearing."

Will Manidis · EssayContinue→