Principal-Agent Problem

It refers to the problem of motivating one party to act on behalf of another. It arises when a principal compensates an agent for performing certain acts that are useful to the principal and costly to the agent, and where there are elements of the performance that are costly to observe. Typically, the case for all contracts that are written in a world of information asymmetry, uncertainty, and risk. Due to obscure nature of software development, the IT industry is very much familiar with this scenario.

Solution is to ensure the provision of appropriate incentives so that Agents act in the way Principals wish.

In the context of Employment, techniques such as piece rates, share options, discretionary bonus, promotion, profit sharing, efficiency wages, deferred compensation, and so on can be used.