The Principal-Agent Problem: Solving It With Incentives
It's hard to get other people to care about what you do. And it's almost impossible if they don't have the same "skin in the game" - if they aren't rewarded or punished directly based on the outcome of their decisions.
It turns out this is a very old problem. It's called the principal-agent problem. And if you're an owner or an employee, you have to understand it.
To me, the principal-agent problem is the single most fundamental problem in microeconomics. If you do not understand the principal-agent problem, you will not know how to navigate your way through the world. It is important if you want to build a successful company or be successful in your dealings.
The principal-agent problem is a name for the inherently competing priorities between an owner (the principal) and an employee (the agent). The agent rarely acts in the best interest of the principal. Instead, the agent acts in their own best interest.
Julius Caesar famously said, "If you want it done, then go. And if not, then send." What he meant was, if you want it done right, then you have to go yourself and do it. When you are the principal, then you are the owner—you care, and you will do a great job. When you are the agent and you are doing it on somebody else's behalf, you can do a bad job. You just don't care. You optimize for yourself rather than for the principal's assets.
