The Principal Agent Problem

The Principal Agent Problem occurs when one person (the agent) is allowed to make decisions on behalf of another person (the principal). In this situation, there are issues of moral hazard and conflicts of interest.

The Principal Agent Problem

Hayek’s Knowledge problem

Frequently mentioned as the most important essays in the history of economic thought, Hayek’s essay “The Use of Knowledge in Society” question the fundamental problem that economics exists to solve?

“The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form,” explains Hayek, “but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

In short he explains that for society to make the best use of all available resources it needs decentralisation together with a price system that communicates information to all market participants.

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