cRYPTO Glossary

Agency theory explores the optimal design of relationships between principals (those who delegate decision-making authority) and agents (those who act on behalf of principals) to reduce the risk of conflicts and inefficiencies.

Explanation:

• Relationship dynamics: Focuses on the complexities and potential conflicts that arise when one party (agent) makes decisions on behalf of another (principal).
• Risk mitigation: Seeks to align interests through incentives, monitoring mechanisms, and contractual agreements to minimize adverse outcomes.
• Applications: Widely studied in corporate governance, where shareholders (principals) elect executives (agents) to manage the company's operations.
• Incentive alignment: Strategies like performance-based compensation and stock options align agent behavior with principal interests.

Key Points for Beginners:

• Governance perspective: Understanding agency theory is crucial for designing effective governance structures in organizations.
• Blockchain relevance: Blockchain technology introduces transparent, decentralized mechanisms (e.g., smart contracts) that can mitigate agency problems by automating and enforcing agreements.
• Risk management: By addressing agency conflicts proactively, organizations can enhance operational efficiency and shareholder value.