Moreover, it is based on the assumption that agents control more information than
principles; this event is called information asymmetry. As a result, the information
asymmetry limits principals’ ability to monitor effectively whether their interests are
being appropriately served by agents. It also assumes that principles and agents act
rationally and that they implement the contracting process to maximize their wealth.
Accordingly, there are two problems in agency theory which are based on the
assumptions that are moral hazard and adverse selection. Moral hazard is agents with
have self-seeking motives they are likely to take the opportunity to transfer wealth from
firms to themselves. Another problem is the adverse selection of the principals that do
not have access to all available information at the time that manager makes a decision,
as a result, owners cannot determine whether manager’s actions are in the best interests