The principal-agent problem happens quite often in business relationships. When a principal hires an agent to perform some tasks, the agent’s interest seems to lie in satisfying their employer. But so often there is a conflict of interest between the two parties or the agent finds the incentives are insufficient to cover the risk. The conflict often arises from the information asymmetry, when one party knows the information that is essential but unknown to the other party. The principal-agent problem also happens when the agent has an ethical conflict with their employer. They lack neither information nor incentives but still cannot perform as agreed. Here are some examples and ways of solving the principal-agent problem.
Information asymmetry happens when the agent is more informed than the principle. The company doing an interior design, for example, may choose costly materials to implement the principal’s draft. They are better aware of the materials and their quality, but the principal’s interest lies in low cost, and so the conflict happens. Detailed negotiations concerning every step of the plan and their expenses shall be conducted to avoid unpleasant surprises.
Ethical problems sometimes arise between the agent and the employer, and there are few ways to resolve them. Imagine the principal who hires a rating agency and demands to set a higher rating than it actually is. The agency, on the other hand, is not willing to risk their reputation. Aware of the conflict, the principal can offer a higher incentive to motivate the company to act against its best interests. Otherwise, the agency shall make it clear that the contract between them is impossible so that the principal starts to search for another agent.
Talking about a lack of incentives, imagine a landlord and their tenant. The landlord covers the electrical utilities, and tenants are not interested in purchasing energy efficient appliances. They are usually costly, and tenants are not motivated to spend more money to save the money of their landlord. In such case, the landlord has to put utility payments on the tenants to make energy efficiency their best interest.
The rational choice theory is a popular economic principle that explains why consumers prefer prudent and logical decisions among all others. The behavior of the entire society is determined by the behavior of every individual, and rational choice theorists claim that their study predicts the consumer behavior and makes the pattern of consumer choices. According to the rational choice theory, people are most likely to make well-considered decisions based on rational calculations that bring them the highest benefit in the result. But the theory looks rather idealistic because our decisions very often are irrational and triggered by emotions rather than the rational calculations.
In fact, all people are motivated to make rational choices at least sometimes. Sometimes we allow ourselves to act on a whim and choose impulsively. If pressed for money, we try to maximize the result within the budget we have at hand and make well-considered choices. At such times, our decisions are indeed rational and calculated. But it is rather an exception to the tendency. There is a field of behavioral economics promoting the idea that individuals often make irrational decisions. In such system, people are moved by their emotions and external factors. They make people choose what is not in their best interest, but it also does not mean that an irrational decision equals an impulsive decision.
The rational choice theory makes perfect sense and it is easy to understand, but still, we cannot apply it to the real life at all times. Politics and marketing experts usually appeal to emotions if they want people to make a certain choice. Strong emotions like happiness, fear, or indignation usually take over the human ability to make considerate decisions.
Among the variety of social studies, political science is the most affluent one. It studies political institutions and their role in the government. Today we also study the impact of societal, cultural, and psychological factors on the government. Political science is rather a systematically organized knowledge than a research paradigm able to produce a precise measurement. Nevertheless, we shall not underestimate this knowledge as it empowers people to be better political leaders.
Political matters have been analyzed yet by the ancient scholars in China, India, and North Africa. In Greece, Plato introduced some ideas about the Republican governance, and Aristotle became the founder of the political science. He derived empirical observations of the politics and created the typology of political systems. The Aristotle’s classification is still helpful in understanding political organization.
Niccolo Machiavelli, the Italian writer, became the first modern political scientist. In the 16th century, he introduced the idea of power as we know it. Machiavellian ideas are popular among the present-day political theorists. Europe was remarkable with its political philosophers, among them Thomas Hobbes (England), Jean-Jacques Rousseau (France), Adam Smith (Scotland). In the US, Thomas Jefferson constituted the American Declaration of Independence based on the ideas of John Locke, the English political philosopher.
In the 19th century, political science was divided into two parts by the opposite views of historians. Alexis de Tocqueville (France) successfully analyzed the American democracy from the point of cultural values. On the other hand, German theorists Karl Marx and Friedrich Engels viewed the capitalist economy as the instrument of domination over the social classes. In the early 20th century, totalitarian regimes that emerged all over Europe and Asia pulled the political science away from its laws and procedures. Studies of this period focused on the role of political elite, bureaucratic processes, and choices of voters in democratic entities.
Social stereotypes are dangerous because people follow them. An African American student who is a superb basketball player cannot be good at math or other academics. A pretty girl who takes care of her looks cannot be smart because she seems to spend all the time on beauty routine. The saddest thing is that people affected by stereotypes are the first to believe in them. They do not attempt to break the shell of social belief that is not supported by any evidence. Stereotyping is just the way we classify strangers judging on the little facts we know.
Stereotypes affect the American society in many ways, but the biggest problem is that they change our own perception of who we are. We do not strive to learn more if we feel incapable of doing tests but can successfully play sports. It looks like we are not designed for academics, which is certainly untrue. A human is supposed to learn different skills over the life. There is no scientific study that proves it is impossible to be smart, athletic, beautiful, black, female etc. at a time. But many people still think that there is no point developing digital awareness or analytical thinking if they are not a “nerd” type of person. Besides, many people find it comfortable to fit stereotypes. Pretty girls, for example, do not go in for engineering because it is not what society expects from them.
Though stereotypes hardly bring any benefits, they are essential for us to classify people. It would be unbearable not to build any expectations or suggestions about the new acquaintance before we get to know the person better. Stereotyping is an essential part of social perception, whether we like it or not.
Rising temperatures devastate environmentalists and the officials who have to deal with the consequences of recent natural disasters. The 2017 Atlantic hurricane season turned to be fierce, and it is a bad news for the southeastern states. At the same time, farmers in the Arctic Circle rub their hands expectantly. The period of hot days has expanded there so that Greenlandic, Russian and Canadian farmers can get more in revenue. Nevertheless, not all of them can see the benefit of global warming. In Greenland, sheep farmers suffer losses due to the hot dry summer.
A decade ago, the early evidence of changes brought by global warming genuinely invigorated farmers in the Arctic region. But now we can see that not everything about their routine is so bright. Hot summer is succeeded with frosty winter without any humid spring or autumn, which narrows agricultural opportunities in Greenland. At best, families on the island can grow vegetables for themselves and depend less on the Danish imports. Beekeepers also can see their businesses improve due to the expanded summer season. The rest of the farmers have actually born losses due to the climate change in Greenland.
The economic loss caused by global warming is more than noticeable. Damage to the property and infrastructure leaves thousands of people in poverty and drains the budgets that issue funds for the rehabilitation of affected areas. Many farmers find their businesses unprofitable because of the pests and weather conditions so that monopolists take over the supply of harvest. In some European countries, businesses that run on fossil fuels watch their shares lose value. High carbon emissions also damage fisheries so that large exporters of fish (Sweden, Chile, Canada, India, the US and more) will lose billions of dollars in revenue by 2050.
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