Sky Air Case

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When and why principal-agent relationships exist?
As we have uniquely seen in the Sky Air article, it is evident that this company is well off and Samuel Kaplan has worked hard to make it successful. But in addition to this, we decipher that he has the dilemma on whether to sell a portion of his company’s stake to Thyestean Ventures. Stacy Simms, the Manager General Partner of Thyestean Ventures sternly, has stated that the corporation will be willing to buy 30% equity stake in Sky Air at not more than $6 million.
Moreover, this kind of offer is troubling Kaplan so much because he thinks that his company is even worth more than $20 million at that given stake of 30 percent. He is also at a juncture of figuring out whether he should take the money since he has more pressing issues when it comes to his private life. The main reason as to why I am illustrating this is because Samuel Kaplan scenario earnestly requires an establishment of a principal-agent relationship.
Furthermore, it is true to say that Kaplan should have an agent who will be officially involved in the process of setting-up a counter proposal. The principal-agent relationship in this kind of situation will stimulate the negotiations since; the principal being Kaplan and the agent may be an attorney will have an agreement on what they want as a counter offer. Kaplan will not be able to make decisions out of personal needs since the agent will be making professional decisions that will be best for the company.

Another reason why a principal-agent relationship is indispensable is for the reason that an agent is specifically trained and experienced in areas that a principal may not have experience. For instance, Kaplan is a mechanical engineer and may not have enough or warranted experience in bargaining his company’s worth, but if he has an agent, it will be easy since the agent would have the know how of these kinds of cases and easily get a better price for Sky Air stakes.
How contracts attempt to deal with the principal-agent problems
One of the ways contracts help in dealing with the principal–agent problems is by removing the aspect of asymmetry between the principal and the agent. These two individuals are supposed to be even regarding agreements, and no one is expected to be hush on the other. Regarding credit rating, the principal, and the agent should be at an agreeable cost for the two to have a cordial relationship. The best way to make things more permanent and become official is to put down a contract signed by the two parties.
Similarly, a contract will quickly illustrate the type or the forms of incentives to be offered to the agent by the principal. At the end of the day, there will have a good principal-agent relationship since there are both on the same page (i.e. the contract).
Examination of principal-agent problems inside a firm
As we have an aforementioned earlier primary cause of principal-agent problems in the enterprise is the lack of symmetry. It is the situation whereby one individual does not care about the needs of the other in a typical working environment. In most companies, another obvious problem that might occur in a principal-agent relationship is the two may not be at par in achieving the mission of the enterprise. A good example is how Kaplan thinks that Thyestean Ventures may not be in line with his goals and objectives about the Sky Air.
Conflicting incentives between the principal and the agent is usually known to occur within corporate. Additionally, this is often brought about by greed and sometimes overconfidence from either of the two. At the end of the day, we find out that the principal-agent problems often require something to prevent them from occurring. Contracts are mostly the indispensable tools in dealing with any form of these issues.
Examination of principal-agent problems between firms or between people external to a firm
As shown by the Kaplan’s case we can easily understand that this is a principal-agent between companies. The biggest problem we can see is the agency costs, whereby Thyestean Ventures are more to their interests and forgetting even to allow Kaplan to counter. These particular challenges result into loss of time and also money since the another party is not considerate.
Moral hazard
It is a phenomenon that poses to be a principal-agent problem in the sense that the agent is on the upper hand as compared to the principal. The agent knows what he has in store for him/herself, but the principal is not aware of the plan. Furthermore, a moral hazard may occur when one party takes more risks just for the reason that another party/individual will stand in for the ultimate costs.
The person who is in disarray is usually the principal since the agent is calculative and knows exactly what he/she is doing.
Discussion of hidden information and hidden action
During the signing of a particular contract, there are things in the contract whereby one’s actions cannot be easily discerned, and this is what is called the hidden action. On the other hand, there are times the actor’s actions in the contract can be observed, but the qualities cannot be readily determined an aspect called the hidden information.
Solutions to principal-agent problems
As we stated earlier, there are various forms of settling principal-agent problems such as through incentive compensation, monitoring, tournaments, etc. In attempting to calm these issues, the parties can sit down and get even grounds so that a deal generation takes place. Incentive compensation is a form of performance appraisal that is set to motivate the agent and later produces excellent services. Similarly, tournaments are also forms of motivations which tend to make people work extra hard for rewards.
Monitoring, in essence, makes the agents be on their feet since they are under a watch. Investment of resources into monitoring is usually done by companies to kept tabs on agents and makes sure they are doing a great job.
In retrospect, one notion of financial gain binds an investor and an entrepreneur correctly. These two individuals primary focus is usually that the company/business makes the profit for the benefit of two. In the article, Mr. Kaplan is an entrepreneur, and Thyestean Ventures is the investor. Although we see that the two companies are in disagreement, their relationship is mainly gauged at how much money one is willing to get or spend. The epicenter is money, each and everyone wants to either spend less (investor) or gain more (entrepreneur in selling company’s stakes).