Excerpt from Determinants of Information Technology Investments: Effects of Top Management Compensation and Stock Ownership
The fundamental problem of an agency relationship is the nonalignment of goals between the two parties constituting the relationship. The agent having the locus of control will simply make decision maximizing his or her own welfare, a process which may not necessarily coincide with the optimization of the principal’s utility (ross, 1973; Jensen and Meckling, To ensure goal congruence, the principal can engage in costly albeit imperfect monitoring. Mitigating mechanisms and bonding schemes can also alleviate the agency problem.
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