Editing Principal–agent problem (section)

== Negotiation ==
In the negotiation problem, the principal commissions an agent to conduct negotiations on its behalf. The principal may delegate certain authority to the agent, including the ability to conclude negotiations and enter into binding contracts. The principal may consider and assign a utility to each issue in the negotiation.<ref>{{Cite journal |last1=Piasecki |first1=Krzysztof |last2=Roszkowska |first2=Ewa |last3=Wachowicz |first3=Tomasz |last4=Filipowicz-Chomko |first4=Marzena |last5=Łyczkowska-Hanćkowiak |first5=Anna |date=2021-07-29 |title=Fuzzy Representation of Principal's Preferences in Inspire Negotiation Support System |journal=Entropy |language=en |volume=23 |issue=8 |pages=981 |doi=10.3390/e23080981 |issn=1099-4300 |pmc=8392366 |pmid=34441121|bibcode=2021Entrp..23..981P |doi-access=free }}</ref> However, it is not always the case that the principal will explicitly inform the agent of what it considers to be the minimally acceptable terms, otherwise known as the [[reservation price]].<ref>{{Cite journal |last1=Lax |first1=David A. |last2=Sebenius |first2=James K. |date=September 1991 |title=Negotiating Through an Agent |url=http://journals.sagepub.com/doi/10.1177/0022002791035003004 |journal=Journal of Conflict Resolution |language=en |volume=35 |issue=3 |pages=474–493 |doi=10.1177/0022002791035003004 |s2cid=143173392 |issn=0022-0027 |access-date=May 2, 2022 |archive-date=May 2, 2022 |archive-url=https://web.archive.org/web/20220502095624/https://journals.sagepub.com/doi/10.1177/0022002791035003004 |url-status=live |url-access=subscription }}</ref> The successfulness of a negotiation will be determined by a range of factors. These include: the negotiation objective, the role of the negotiating parties, the nature of the relationship between the negotiating parties, the negotiating power of each party and the negotiation type. Where there are information asymmetries between the principal and agent, this can affect the outcome of the negotiation. As it is impossible for a manager to attend all upcoming negotiations of the company, it is common practice to assign internal or external negotiators to represent the negotiating company at the negotiation table. With the principal–agent problem, two areas of negotiation emerge:

# negotiations between the agent and the actual negotiating partner ('''negotiations''' '''at the table''')
# internal negotiations, as between the agent and the principal ('''negotiations behind the table''').<ref>Jung, Stefanie; Krebs Peter (15 June 2019). "The Essentials of Contract Negotiation". ''Springer International Publishing''. [[doi:10.1007/978-3-030-12866-1]] {{Webarchive|url=https://web.archive.org/web/20220502082410/https://link.springer.com/book/10.1007/978-3-030-12866-1 |date=May 2, 2022 }}</ref>

The principal-agent problem can arises in representative negotiations where the interests of the principal and the agent are misaligned. The principal cannot directly observe the agent's efforts during the course of the negotiation. In such circumstances, this may lead to the agent employing negotiation tactics which are unfavourable to the principal, but which benefit the agent. Depending upon how the agent's reward is determined, the principal may be able to effectively retain control over the agent. If the agent receives a fixed fee, the agent may nonetheless act in a manner that is inconsistent with the principal's interests. The agent may adopt this strategy if they believe the negotiation is a one-shot game. The agent may adopt a different strategy if they account for reputational consequences of acting against the principal's interests. Similarly, if the negotiation is a [[repeated game]], and the principal is aware of the results of the first iteration, the agent may opt to employ a different strategy which more closely aligns with the interests of the principal in order to ensure the principal will continue to contract with the agent in the following iterations. If the agent's reward is dependent upon the outcome of the negotiation, then this may help align the differing interests.<ref>{{Cite journal |last1=Miller |first1=Gary J. |last2=Whitford |first2=Andrew B. |date=1 April 2002 |title=Trust and Incentives in Principal-Agent Negotiations: The 'Insurance/Incentive Trade-Off' |url=http://journals.sagepub.com/doi/10.1177/095169280201400204 |journal=Journal of Theoretical Politics |language=en |volume=14 |issue=2 |pages=231–267 |doi=10.1177/095169280201400204 |s2cid=17436198 |issn=0951-6298 |access-date=May 2, 2022 |archive-date=January 20, 2023 |archive-url=https://web.archive.org/web/20230120144749/https://journals.sagepub.com/doi/10.1177/095169280201400204 |url-status=live |url-access=subscription }}</ref>