When we introduced the principal-agent problem. the owner of the firm was viewed as haveing different objectives from the manager. There isnothing special about the owner-manager relationship that gives rise tothe principal-agentprob-lem:indeed.there is a similar problem between the manager and theemployeer she or he supervises.
To see this. suppose the managre is being paid a fraction of profits and thus has an incentive to increasethe the firm's profits. The manager cannot be in several places at the same time and thus cannot monitor every worke even if he or she wanted to Theworkers,on the other hand,would just as soon gossip and drinkcoffee as work.How can the manager(the principal) induce the workers(the agents) notto shirk?