Information asymmetry in principal-agent relationships

The primary objective of this assignment is to demonstrate occurred principal-agent problems within the collapse of Enron. The secondary objective is to discuss possible safeguarding activities on the case of Enron and their impact on principal-agent relationships. Figure 1 shows the methodology of the assignment.

Figure 1: Methodology

Firstly, the theoretical framework regarding the principal-agent theory will be set. It will be shown that information asymmetry is the cause for the relationship between two parties, described by the principal-agent theory. Different parties will be given different instruments to compensate information asymmetry and safeguard the current relationship regarding their own interests. The principal-agent theory provides instruments that help to identify explanations and problems of the participating actors. These instruments will be briefly shown.

Having set the theoretical framework of principal-agent theory, these instruments will be mapped to a specific situation in economic business. The practical example of Enron comes into focus: the different instruments of the principal-agent theory will be shown regarding its effectiveness. In order to reduce the complexity within the case of Enron, two specific cases and their individual principal-agent relationships will be presented. It will be questioned what instruments have been used, and what were the major problems, principal and agent had to face?

Afterwards the used instruments will be discussed in a wider range. The used instruments will be balanced generally whether they have an added value regarding the objectives of all participating actors of regarding the specific case of Enron. Positive and negative side effects will be shown.

Finally, the conclusion summarizes the achieved results and answers the question what lessons could be learned regarding the use of principal-agent theory instruments specifically and in general. The conclusion will also give further recommendations how to safeguard principal-agent relationship within a highly complex environment.