What is Principal-Agent Dilemma?

The principal-agent dilemma is a conflict in priorities found between a person, entity, or group (principal) and a party who has been authorized to act on their behalf (agent). The dilemma is a result of misaligned incentives when an agent is incentivized to act towards their own benefit over the benefit of the principal, or those they are enacted to represent. The principal-agent dilemma is evident throughout business, finance, and markets, and often requires changing a system's reward structure to balance the priorities of both sides — which is the principal endeavor of incentive alignment.