Final answer:
The principal-agent problem occurs when an agent takes actions that are not in the best interest of the principal, which can arise from different incentives and the principal's inability to observe the agent's actions. Examples include corporate managers making decisions for short-term gains at the expense of the company's long-term health.
Step-by-step explanation:
When a principal-agent problem occurs, the agent engages in actions that the principal cannot observe and that are not in the principal’s best interest. This is a scenario where the agent, who is supposed to act on behalf of the principal, may have different incentives that lead to a divergence in actions. In the context of collective action problems, individuals may act in their self-interest, which can potentially harm others or even themselves in the long run. These problems highlight the difficulties in aligning the objectives of an agent with those of the principal, especially when the actions taken are not directly observable, and there is a risk of the agent prioritizing their interests over those of the principal.
For example, in a corporate setting, a manager (agent) might make decisions that boost short-term profits to receive a large bonus, even though these actions may not be sustainable and could harm the company (principal) in the long term. This detachment of interests creates a challenge in governance and incentive design. Moral hazard and adverse selection are typical outcomes of the principal-agent problem, where agents perform suboptimally because they bear less risk or have information asymmetries.
In the case of prisoner's dilemmas, collective action problems become particularly pronounced because individuals have strong incentives to make choices that are not socially beneficial. The traditional solutions for these issues include implementing monitoring systems, creating better alignment of incentives, and designing policies that encourage cooperative behavior. Agent-principal problems and collective action dilemmas require consideration of both the immediate and longer-term consequences of agents' actions, given the potential for such actions to have broader, unintended negative impacts.