Agency theory is concerned with the problem that arises when it is difficult or inexpensive for the principal to verify what the agent is actually doing.

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Agency theory is concerned with resolving two problems that can occur in agency relationships between two primary players. These are the principals, who are the owners of the firm (stockholders), and the agents, who are the people paid by principals to perform a job on their behalf (management). The first is the agency problem that arises (1) when the goals of the principals and agents conflict and (2) when it is difficult or expensive for the principal to verify what the agent is actually doing.

Agency Theory Is Concerned with the Problem That Arises When