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Showing posts from October, 2020

Taxation and the Principal-Agent problem

The principal-agent problem [PAP], in political science and economics, occurs when one person or entity (the "agent"), is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the "principal". This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard. One of the relatable cases of PAP is sales - the sales executive is likely to motivate you to buy those products where s/he earns more commissions, rather than those which are cheaper or beneficial for you. This problem occurs in any kind of a sale whether its a kitchen appliance or insurance product. Maybe you've already guessed where I am going with this - the PAP with taxes. The government is an agent which levies a charge (taxes) on its people - possibly the strangest of principal-agent relationships [in all other cases, the agent is usually pa