Taken literally and alone, the basic Principal-Agent model may seem too abstract
to be useful. But we begin with this model because it is an essential building block for
many discussions throughout the course—concerning not only managing the incentives
of individuals but also managing the incentives of organizational units (such as teams or
divisions) and of firms themselves (such as suppliers or partners). Furthermore, this
abstract model allows us to consider the nature and use of economic models more
generally, as follows.