Agency cost

An agency cost is the cost incurred by an organization that is associated with problems such as divergent management-shareholder objectives and information asymmetry.

The information asymmetry that exists between shareholders and the Chief Executive Officer is generally considered to be a classic example of a principal-agent problem. The agent (the manager) is working on behalf of the principal (the shareholders), who does not observe the actions of the agent. This information asymmetry causes the agency problems of moral hazard and adverse selection.

These costs were first identified by Michael Jensen and William Meckling in 1976.