principal-agent model

The principal-agent problem usually arises when one party (agent) agrees to work in favor of another party (principle) in return for some incentives. Such an agreement may incur hie costs for the agent thereby leading to the problems of moral hazard and conflict of interest. Owing to the costs incurred, the agent might begin to pursue his own agenda and ignore the best interest of the principle, thereby causing the principal agent problem to occur. Usually information asymmetries will cause the agent to withhold some type of information and work within self-interest even when it seems like they are working for the principle. I think a good example of this is an example I have read about and it is when you want to sell your house and you use a realtor to help.

Imagine that you live in a suburb and your old neighbors house (which is the exact same model as yours) sold for $250,000 six months ago. Obviously since the house is the same (in terms of how many bedrooms, baths, walk in closets, finished basement, etc) you are assuming that you can get the same amount and strive to make $250,000 yourself. You receive an offer today for $240,000 and you are wondering if you should take it or not. The realtor (agent) say they work for you and your house (principle 1) but they are also doing a job and have a boss/ agency they need to make money for (principle 2). The realtor will say absolutely take this offer as your interests are aligned so they want you to sell it for as much as possible. They will most likely also say things like "oh the market is softening up" or "you do not want to turn down an offer within 'x' amount of your asking price", I am an expert I have been doing this for 10 years, etc.

However if the real estate agent was selling their home that was the exact same type of house as the seller above then they would hold out and wait for a better price (the $250,000 or higher). This is because the contracts between home buyers/sellers and realtors are not well aligned. The realtor will say take this asking price of $240,000 for a variety of reasons: first the extra $10,000 made is split up into many parts where the realtor would only get 6% ($600) commission but then that is further divided in half to pay the buyer's realtor. Now the realtor only has $300 extra commission that is further divided in half to pay the agency so the realtor is only walking away with ~$150 for helping you get to $250,000 selling price. To get to that price the realtor may have to organize open houses, show potential buyers around, and pay for the advertising for who knows how many more days/ weeks. The realtor could be off selling another house whole with this time making much more money than he would be helping you get $10,000 more from selling your house because he is making 1.5% ($150) only of that increase in price.

I cannot honestly say if I truly know how these different principles would resolve each other in practice I would assume that half of the realtors act with fiduciary-intents and half want the person to take the lower offer so they can move onto selling more houses. The way I see it there are only 3 options in the scenario: take the money the realtor is saying (lower than asking price), do not listen which essentially forces the realtor to keep working on your behalf, or just fire the realtor and attempt to sell the home yourself. In this scenario I think the agent (realtor) only 100% succeeds or 100% fails because if they sell the house the agency is still making some sum of money (maybe its a bad sale and the realtor gets yelled at for not making enough but thats a different issue) or they do not/ are fired wherein both principles are not satisfied (seller for not getting good advice and paying this realtor and the agency for being pissed off that the realtor did not close a deal).