The Principal-Agency Theory In The Theory Of Agency Theory

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2.3. Agency Theory Agency Theory (AT) is often applied in order to explain certain phenomena in the context of franchising (e.g. Brickley and Dark, 1987; Carney and Gedajlovic, 1991; Doherty and Quinn, 1999). This section therefore deals with some aspects of AT such as the principal-agent model, AT’s application in franchising, agency problems and costs, and it lists measures to remedy those issues. 2.3.1. The Principal-Agent Model Agency Theory emerged as a number of economists such as Arrow (1970) and Wilson (1968) explored risk-sharing among individuals and groups in the 1960s and early 1970s. The initial framework explained that risk-sharking problems occur when participants have diverging attitudes towards risk. AT added to this concept by stating that the root of such problems lies in the fact that the parties involved have different ambitions and division of tasks (Jensen and Meckling, 1976; Ross, 1973). Agency Theory’s central premise is the assumption that the interests of two participants, who enter a contractual relationship, diverge. In AT, the two parties in this relationship are known as the principal and the agent. The principal requires the agent(s) to perform a number of delegated tasks and thus attributes some decision-making authority to him/her (Bergen et al., 1992; Eisenhardt, 1989; Jensen and Meckling, 1976). While this relationship acts as a utility maximizer for both partners, the agent may not always perform his/her tasks as demanded by the

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