Cite this article as: Jason Mance Gordon, "Principal Agent Relationships in Negotiations," in The Business Professor, updated October 22, 2017, last accessed February 19, 2020, https://thebusinessprofessor.com/knowledge-base/principal-agent-relationships-in-negotiations/.
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What is a principal-agent relationship and how does it affect a negotiation?
Advantages of agents include:
- Substantive knowledge – Principal’s often identify agents who have a level of knowledge or expertise in the subject matter of the agency. Such expertise generally results in higher level of proficiency in the negotiation.
- Networks and special influence – Principals often seek out agents who have an existing network that will aid in the negotiation. The agent’s network allows her to exercise additional influence on the negotiation or the other party.
- Emotional detachment – Agents are less emotionally involved in the outcome of the negotiation. Emotion can often compromise logic and lead irrational decision making.
- Ratification – The principal can review the actions of the agent after the fact. If desirable, the principal can unilaterally accept any actions taken by the agent that are outside of her express authority.
- Face-saving – Mistakes or missteps by an agent can be disclaimed by the principal. This layer of separation may allow the principal to save face in the event of an unfortunate outcome.
- The disadvantages of agents includes:
- Shrinking ZOPA – The agent will generally receive some form of compensation or remuneration for their services. This syphons away value from what is at stake in the underlying negotiation. Also, an agent may not have the unilateral authority to adjust target or reservation points. As such, the zone of potential agreement is reduced.
- Incompatible incentive structure – Often, principal-agent relationships are structured where the agent’s incentives conflict with the interests of the principal. That is, the agent will receive greater benefit by reaching a resolution that is not in the best interest of the principal.
- Communication distortion and message tuning – This concerns the way in which senders tailor communication of messages to fit specific recipients. The agent may not fully understand the principal’s objectives. Further, the method in which an agent delivers a message during negotiations may not fully align with the principal’s message.
- Loss of control – Employing an agent vests a level of authority to act on behalf of the principal. Any actions by the agent within her authority bind the principal. As such, the principal loses a level of control over the negotiation.
- Agreement at any cost – Agents may have the perverse incentive reach an agreement at any cost. When the function and objective of the agent is to reach an agreement with the other party, the agent may be unduly set on reaching an agreement rather than pursuing a more beneficial BATNA.
The tactics for effectively working with agents, include:
- Shopping around – All agents are not created the same. Find an agent that demonstrate the above-referenced benefits without identifiable disadvantages.
- Understanding Power – Knowing your BATNA before meeting with your agent. This will help you in delineating the authority and objectives of the agent. You may need to fully convey this to the agent when acting on your behalf. In other instances, you may need to convey your interests to your agent without giving away your BATNA. This reserves your power as the ultimate decision maker in the relationship.
- Capitalizing on the agent’s expertise – If the agent has a level of expertise, it is important to put this knowledge or skill to work. Be careful not to set limits on the agent that diminish the utility of these attributes.
- Capitalizing on agent’s network – Always attempt to tap into your agent’s sources of information. This is one of the greatest benefits that the agent brings to the relationship.
- Discussing ratification – Explain to your agent the limits of their authority. Let her know the extent of your willingness to ratify her actions if beyond the scope of her authority.
- Using your agent to help save face – An agent creates a layer of personal interaction between parties. As such, the principal can use this level of separation to avoid accepting responsibility for loss in the event of an undesired outcome.
- Using your agent to buffer emotions – Parties to a negotiation often get emotionally charged when interacting with the other party. The presence of emotion can lead to irrational decisions and actions. An agent is generally emotionally attached and can remain objective in such situations.