Define: Agency Cost View

Agency Cost View is a concept in finance and economics that refers to the potential conflicts of interest and costs that arise when one party, known as the principal, delegates decision-making authority to another party, known as the agent. The agency cost view suggests that these conflicts and costs can arise due to the differing goals and incentives of the principal and the agent.

In this view, agency costs can manifest in various ways, such as the agent pursuing their own self-interests instead of acting in the best interest of the principal, shirking responsibilities, engaging in excessive risk-taking, or engaging in opportunistic behavior. These actions can result in financial losses, reduced efficiency, and overall suboptimal outcomes for the principal.

The agency cost view emphasizes the importance of designing appropriate mechanisms and incentives to align the interests of the principal and the agent. This may include monitoring and performance evaluation systems, contracts, compensation structures, and other governance mechanisms to mitigate agency costs and ensure that the agent acts in the best interest of the principal.

Overall, the agency cost view highlights the potential conflicts and costs that can arise when decision-making authority is delegated, and emphasizes the need for effective governance and control mechanisms to minimize these costs and align the interests of the principal and the agent.