Agency theory studies the problems and solutions linked to delegation of tasks from
principals to agents in the context of conflicting interests between the parties. Beginning from
clear assumptions about rationality, contracting and informational conditions, the theory
addresses problems of ex ante (“hidden characteristics”) as well as ex post information
asymmetry (“hidden action”), and examines conditions under which various kinds of
incentive instruments and monitoring arrangements can be deployed to minimize the welfare
loss. Its clear predictions and broad applicability have allowed agency theory to enjoy
considerable scientific impact on social science; however, it has also attracted considerable
criticism. [99 words]