[1] Specifically, the multiple principal problem states that when one person or entity (the "agent") is able to make decisions and / or take actions on behalf of, or that impact, multiple other entities: the "principals", the existence of asymmetric information and self-interest and moral hazard among the parties can cause the agent's behavior to differ substantially from what is in the joint principals' interest, bringing large inefficiencies.
Principal–agent theory has suggested that some governance mechanisms can help align the interest of the principal with those of the agent.
[4] Clear directives build awareness of expectations, and provide the principal with criteria to audit; similarly, some incentives, such as variable pay or bonus-malus systems, can help align the agent's interests with the principal's interest.
[4] The simple principal-agent model involves only one agent, one principal, and one task, and is a simplification of reality.
[5] Second, individual principals may free-ride in the steering or monitoring of the agent, leading to insufficient governance.
[8][9] An example of how this can occur in practice is when Congress and the White House pressure agencies to pursue conflicting objectives.
[10] Examples of other public sector organizations in which this problem may occur are in parliaments, ministries, agencies, intermunicipal cooperation, and public-private partnerships.