Business organizations involve complex interactions of economic and social forces. We observe and analyze organizations using a combination of economics, ethics, sociology and systems theory.


A relationship between an agent and a principal. For example, the directors of a company are the agents of the shareholders.
In agency theory, economists study the costs, risks and inefficiencies of this relationship.

The principal typically incurs monitoring costs, to guard against the possibility that the agent may be stealing from him, or concealing relevant information (moral hazard).

The agent may incur bonding costs, to align his actions with the interests and expectations of the principal. For example, publicly quoted companies are required to conform to the (short-term) expectations of the stock market, even though this may not be in the long-term interest of the company and its investors.