Learn how to negotiate like a diplomat, think on your feet like an improv performer, and master job offer negotiation like a professional athlete when you download a copy of our FREE special report, Negotiation Skills: Negotiation Strategies and Negotiation Techniques to Help You Become a Better Negotiator, from the Program on Negotiation at Harvard Law School.


principal agent theory

What is Principal Agent Theory?

Though agents can be indispensable in certain contexts, their role can be fraught with peril for the principal, as principal agent theory suggests.

Principal agent theory, which emerged in the 1970s from a number of economists and theorists, describes the pitfalls that often arise when one person or group, the “agent,” is representing another person or group, known as the “principal.”

There are three distinct advantages of hiring an agent to negotiate for you:

  1. When you’re unsure of the issues under discussion or the rules of the game, you’d be wise to seek out an experienced agent.
  2. When you don’t have the time to meet with potential partners in a distant location or participate in every step in the process, you’re unlikely to represent yourself well.
  3. You have a poor relationship with your negotiating partner.

Despite these drawbacks, principal agent theory also points out three ways in which agents may differ from their principals. 

  1. The agents may have different preferences from their principal, such as willingness to work. 
  2. Agents may have different incentives from the principal, because they may have a different stake in the outcome or may receive different rewards than the principal. 
  3. Agents may have information that is unavailable to the principal, or vice versa. These types of divergences may give rise to problems relating to monitoring, incentives, coordination, and strategy.

Learn how to negotiate like a diplomat, think on your feet like an improv performer, and master job offer negotiation like a professional athlete when you download a copy of our FREE special report, Negotiation Skills: Negotiation Strategies and Negotiation Techniques to Help You Become a Better Negotiator, from the Program on Negotiation at Harvard Law School.

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The following items are tagged principal agent theory:

Power Asymmetry and the Principal Agent Problem

Posted by Lara SanPietro & filed under Teaching Negotiation.

Downloadable Video Simulation from the Teaching Negotiation Resource Center This video simulation on power asymmetry and principal agent dynamics by Professor Lawrence Susskind and Robert Wilkinson was designed to give students insights into the challenges surrounding difficult conversations, both with people across the table, as well as with people on their own side. The Power Asymmetry and … Read More 

How to Balance Your Own Values in Negotiation

Posted by PON Staff & filed under Business Negotiations.

What are the best negotiation examples from real life? Imagine that you’ve been negotiating the sale of a property that is owned by your company. The buyer has made an attractive offer that you’ve tentatively accepted. Your boss is pleased with the terms as they stand, but suggests that you go back to the buyer … Read More 

Communicate Your Interests Behind the Deal

Posted by PON Staff & filed under Mediation.

As integrative negotiations students know well, focusing on interests in negotiation has proven to be the most reliable way to create value and resolve conflicts. Experience indicates that communicating with your lawyers the motivations behind a deal or negotiated agreement is well worth the time. … Read More 

The Impact of Anxiety and Emotions on Negotiations

Posted by PON Staff & filed under Negotiation Skills.

Intense negotiation scenarios, we often choose to consult an expert for advice, preferably someone who has carried out hundreds of similar deals with great success. When we consult with others on our negotiations, we must weigh their advice against our own opinions and research. Past negotiation research finds that we tend to undervalue advice from … Read More 

What Does Conflict Management Mean in Business Negotiations with Competitors?

Posted by Katie Shonk & filed under Conflict Resolution.

They say it pays to keep your friends close and your enemies closer, but in business negotiation, keeping your enemies—or competitors—close could end you up in court, as Apple’s recent encounter with the U.S. Department of Justice suggests. The story begins back in 2007 when, unhappy with Amazon’s low, flat price of $9.99 for e-books, five … Read More