Principal-Agent Problem: A Study of Economic Impact and Solutions

This report analyzes the Principal-Agent Problem, focusing on its impact on green leasing and the Saudi Vision 2030. The study references the work of Possamai & Touzi (2017) and Cai & Singham (2018), highlighting the challenges arising from incentive gaps between facilities managers and landlords. The article discusses how the conflict between the principal and the agent undermines policy implementation, specifically in the context of promoting environmental sustainability and achieving the economic goals outlined in the Saudi Vision 2030. The report emphasizes the implications of the principal-agent relationship on employment, investment, and the overall success of economic reforms, as well as the need for strategies to mitigate these conflicts. The report also references Al-Qahtani & Ajina (2017) and Stevens (2016), reinforcing the significance of the problem in various sectors and the need to address it for effective economic development.

Running head: PRINCIPAL AND AGENT PROBLEM
Principal and Agent Problem
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Table of Contents
Article..............................................................................................................................................2
Summary..........................................................................................................................................2
Reference.........................................................................................................................................4

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Article
https://www.emerald.com/insight/content/doi/10.1108/F-01-2018-0017/full/html
Summary
The article discusses about the sustainability practices that can effectively mitigate the
negative influence on the environment due to buildings. The author states that the role of
facilities manager is of utmost importance in order to achieve the desired level of environmental
sustainability in the case of buildings (Possamai & Touzi, 2017). The policy that incorporate this
objective is called the green leasing. Green lease is an agreement that occurs between a tenant
and a landlord. However, another player is the facilities manager that is meant to easing of the
process of agreement between the landlord and tenant. The study found that there exists
significant amount of incentive gap between the facilities manager and land lord. Thus, there is
presence of double problem of principal and agent (Cai & Singham, 2018). Facilities manager is
the agent and landlord is the principal when the relation is between facilities manager and
landlord. On the other hand, in the case for landlord and tenant, landlord is the agent and tenant
is the principal. Facilities manager acts as per their interest and the case in the same for
landlords. Due to this reason, there occurs dispute in the contracts if the facilities manager does
not successfully play its role.
From the discussion of article, it can be said that principal agent problem is a major
problem that causes failure of various polices meant for social and economic development. The
article showed how interest conflict between principal and agent leads to the failure of green
leasing. This problem has significant implication on the Saudi Vision 2030 (Al-Qahatani &
Ajina, 2017). The objective of the Saudi Vision 2030 is to improve the economy of the country

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by improving the employment condition, empowerment of women in the workforce, increase
public investment and foreign direct investment. In addition to that, the country is aimed to
improve the society of the country by improving the health, entertainment and cultural activities
of the country (Stevens, 2016). However, there is principal agent relationship exists in all the
sectors and thus successful implementation of Saudi Vision 2030. For example, increasing
employment is a difficult task as because the managers of organizations tries to produce more by
using less amount of workers and thus objective of increasing employment under Saudi Vision
2030 is compromised due to principal and agent problem.

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Reference
Al-Qahtani, T. H., & Ajina, A. (2017). The Impact of Ownership Structure on Dividend Policy
the Evidence from Saudi Arabia. Journal of Emerging Issues in Economics, Finance and
Banking, 6(1), 2187-2202.
Cai, W., & Singham, D. I. (2018). A principal–agent problem with heterogeneous demand
distributions for a carbon capture and storage system. European Journal of Operational
Research, 264(1), 239-256.
Possamai, D., & Touzi, N. (2017). Dynamic programming approach to principal-agent
problems (No. 1510.07111).
Stevens, P. (2016). Economic Reform in the GCC: Privatization as a Panacea for Declining oil
Wealth?. Chatham House for the Royal Institute of International Affairs.