Double trouble

SOMEONE WISE once said that all the problems of capitalism are agency problems. Agency costs arise when somebody (the principal) delegates a task to somebody else (the agent) and their interests are at odds. In the textbook example, the principal is a manager, the agents are employees. It is in the manager’s interest that the agent works hard. The more effort each worker puts in, the higher the firm’s output and the greater its profits. But the employer cannot gauge the true effort of the workers, especially if the results are a team effort. Each worker has an incentive to shirk.