The principal-agent problem occurs when one party (the "agent") makes decisions or takes actions on behalf of another party (the "principal"), but their interests are not perfectly aligned, and the agent has more information than the principal. This asymmetry of information can lead the agent to act in their own self-interest rather than in the best interest of the principal

. A classic example is a mechanic (agent) advising a car owner (principal) on repairs. The mechanic knows more about the car's condition and may recommend unnecessary repairs to increase their earnings, while the car owner cannot easily verify if these repairs are needed. This misalignment of incentives and information creates the principal-agent problem

. The problem is common in many relationships, such as employers and employees, doctors and patients, or voters and elected representatives. The principal must try to incentivize the agent to act in their best interest, but perfect alignment is often impossible due to the agent's own motives and limited tools available to the principal for control or incentives

. In summary, the principal-agent problem is about the difficulty in ensuring that an agent acts in the best interest of a principal when the agent has more information and potentially different incentives