Sunday, September 2, 2012

"So what does she want?"

Good morning everyone! After a month's worth of vacationing the Everyday Economist is back to discuss events from our everyday lives with an economic twist. Today, I would like to focus on what we label in economics as the principal agent problem.

Have you ever been to a restaurant where the service was absolutely awful? Of course you have. Just take a look at websites like travelocity with its restaurant customer feedbacks. Chances are that you have also warned your friends to stay away from such a place.

In August, me and my significant other visited the good ol' USA. One night we decided to have dinner at a well known restaurant in Miami. The restaurant hostess was quick to show us to our table and promised that the waitress would be with us in a couple of minutes.

Fifteen minutes later, we were still waiting. When I tried calling on a random waiter, I was told in a rather strict tone that I should be patient. A couple of minutes later, our waitress appeared to inquire what we would like to drink. It was clear to her at that time that we were foreigners because despite living there for a good 10 years I can still not get the accent right.

I figured, since she was already there, we could go ahead and order our dinner as well. After placing my order, the waitress turned to my significant, other took one look at her, looked at me and asked..."so what does she want?" How unprofessional, how rude! We were extremely hungry, otherwise we would get up and leave.

I remember thinking at the time that this is a classic example of the principal agent problem. In this case the principal (the restaurant owner) hires an agent (the waitress) to perform a task on his behalf. The waitress should, in theory, have the best interest of the owner in mind. In other words she should tend to the restaurant patrons in such a way so as they become returning customers.

However, the waitress has her own agenda, namely the wage that she receives every month, despite the impression that she makes to the clients. In the end, the waitress has HER best interest at heart, NOT the restaurant owner's.

This problem is evident in our everyday lives in any situation where a person is hired to perform a task. It arises because of asymmetric information. In other words, the agent has more information about the task than the principal. In our example, the waitress has direct contact with the customers, where the restaurant owner does not.

So next time you come across bad service, think about the principal agent problem, turn around and run away!

Have a principal agent problem free day.


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