Agency Costs
Candlefocus EditorAgency costs involve more than just the physical cost of an individual’s time. When there is an agency cost, it means that the company is losing resources such as money, time, and efficiency due to the conflict of interests between the two parties. When it comes to agency cost, it is beneficial to keep the cost low to increase the overall efficiency of the organization.
Agency costs can also arise from informational asymmetries. In this situation, the principal has limited access to information or the agent may withhold some important information from the principal which can affect their decision making. This leads to a situation where the principal does not have full knowledge about their agent’s actions, which means that they need to spend more resources to monitor and control the agent.
In a situation when the agent's actions best suit the interests of themselves rather than the principal, it causes inefficiencies and agency costs. These agency costs can have a direct effect on the organization's overall financial health and productivity. This can add to the overall agency costs as both parties need to dedicate resources toward resolution as well as create any additional costs associated with the delay of decision-making due to the conflict.
Agency risk is another type of agency cost which involves managing the potential conflict between the two parties. This type of agency cost is often associated with hiring the services of external firms to help resolve any conflicts of interest which could add additional fees to the total cost of making the transaction.
Overall, agency costs are an internal cost which can add up if the proper steps are not taken to address the conflict of interests between the agent and the principal. If the agency costs are left unchecked, it can create inefficiencies and have a direct impact on the profitability of the organization.