4  BIS Review 123/2010  outcomes. 6 An important branch of information economics, principal-agent theory, considers the implications of differences in information between the principals in a relationship (say, the shareholders of a firm) and the agents who work for the principals (say, the firm’s managers).
Because the agent typically has more information than the principal – managers tend to know more about the firm’s opportunities and problems than do the shareholders, for example – and because the financial interests of the principal and the agent are not perfectly aligned, much depends on the contract (whether explicit or implicit) between the principal and the agent, and, in particular, on the incentives that the contract provides the agent.