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The principal-agent problem in economics refers to the conflict of interest that arises when a principal (such as a company owner) delegates decision-making authority to an agent (such as a manager) who may not always act in the best interest of the principal. This can lead to moral hazard and adverse selection, where the agent may prioritize their own interests over those of the principal.

In organizations, this can result in inefficient decision-making, as agents may not always make choices that maximize the principal's welfare. This can lead to a lack of accountability, reduced motivation, and potential agency costs. To address this issue, organizations may implement mechanisms such as performance incentives, monitoring, and clear communication to align the interests of principals and agents and improve decision-making efficiency.

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