Don’t Be a Principal-Agent Problem

An agent is a person or entity who takes actions on behalf of another person or entity, called a principal. Common examples include corporate executives (agents) and shareholders (principals) and politicians (agents) and citizens (principals).

A principal-agent problem happens when an agent’s interests conflict with the interests of a principal that they are supposed to be acting on behalf of. Common examples include, well, corporate executives and shareholders and politicians and citizens.

Once you learn about principal-agent problems you begin to see them everywhere. You’ll also see lots of things that are sort of like miniature principal-agent problems. For example, I have a doctor’s appointment today. During my appointments with him, he has implicitly agreed to act in the interest of my health. And yet, this doctor always seems like he is trying to end the appointment as quickly as possible, to the extent that I don’t have any time to ask questions. I don’t know exactly what personal interest he is pursuing, but he gets paid per appointment, so maybe it’s that. My interests are harmed; the quality of care I receive is worse.

I urge you: don’t be the problematic agent. You should actually do the things you are obligated to do on behalf of other people. Being sincere is good. It is incredibly insincere to claim to be doing things on behalf of someone else but actually be optimizing for your own reward. Rethink the way you approach your work. Lots of professions consist of mostly principal-agent problems, like real estate agents.

CEOs should literally do what is good for the business as a whole, not what maximizes their pay. I don’t mean that they shouldn’t be paid a lot, or negotiate to maximize their pay; just that they shouldn’t make business decisions out of their own interest rather than the company’s interest. It’s technically illegal not to do this, but impossible to enforce because there’s always plausible deniability—anything that could be a plausibly justifiable business decision is considered acceptable. This probably has a massive negative impact on the economy.

The same thing applies to you if you work at a company; everything you do at work should be in the best interest of the company. It’s the “creating shareholder value” meme, but unironically. You shouldn’t be doing workplace politics or trying to advance your career. You should be creating shareholder value, because it’s Honest Work, and it’s also what makes capitalism work.

This is the great thing about startups. Startup founders and employees own significant equity in the company and therefore their incentives are more directly aligned with the principals (because they are both agents and principals). This probably has a significant effect on why startups are more of a meritocracy than other areas of the economy (though part of this has to do with the nature of software engineering).

I already see little principal-agent problems when I use AI agents. I don’t have much to say about that yet but I’d feel weird if I didn’t mention AI in what is, after all, a blog post.

The last few weeks I’ve just been writing stream-of-consciousness style. I’m super busy with work at the moment so I suspect this will continue for the next month or two.