Principal-Agent Problem

You hire a contractor to renovate your kitchen. They know more about construction than you — that’s why you hired them. But they also benefit from expensive solutions, extended timelines, and scope creep. Your interests and theirs diverge.

This is the principal-agent problem. The agent acts on your behalf, but their incentives don’t align with yours.

Once you see this, you see it everywhere.

Executives manage companies for shareholders but benefit from empire-building. Doctors recommend treatments but get paid per procedure. Politicians represent voters but respond to donors. Real estate agents want quick sales; you want the best price.

Wherever someone acts for another, misalignment lurks.

The standard solutions: align incentives (stock options, bonuses), monitor behavior (audits, reviews), or select for values (hire people you trust).

None work perfectly. Incentives get gamed — see goodharts law. Monitoring is expensive and incomplete — you can’t watch everything. Selection can’t see inside minds — people can fake values.

The principal-agent problem can be managed but not eliminated. Every delegation involves trust. Trust can be betrayed.

skin in the game is the deepest solution. When agents bear consequences, alignment becomes structural. The builder who must live in the house builds it well. The investor risking their own money chooses carefully.

But you can’t give everyone skin in the game. The economy runs on delegation. The question isn’t whether to delegate but how to structure it so the people acting for you also act in your interest.

I don’t have a clean answer. I just try to notice when I’m the principal and when I’m the agent — and what that implies about whose interests are being served.