Question

Why are the incentives of the seller and the seller-agent not perfectly aligned? Can you propose a way to structure the agent’s compensation so that the agent and seller's optimal decisions are closer to one another’s?

Answer 1

Answer: Seller is a person who sells something to interested customers and satisfy their demands.

Seller-Agent is one who makes decision or take actions on behalf of seller.

The incentives of the seller and the seller-agent never perfectly alligned where agents are motivated to act their own best interests, which are contrary to those of their seller. The problem arises where the two parties have different interests, asymmetric communication and understanding.

Example: Shareholders of a company appoint managers to look after the proceedings of the company and earn profits on their behalf. The shareholders expect the managers to distribute all the profits to the shareholders. But manager senses their own growth and salary expectations try to retain the profits for future as a safe side. This can lead to seller and seller-agent problem.

With the Seller and Seller-Agent problem, below area of negotiation emerge:

Negotiation between the agent and the seller: It means at the time of appointing agent, seller should negotiate some terms so that in future no conflicts arises. They should discuss each and every policy regarding every duties and services. The interest of doing the job should be clear from both of them side so that at some point they can take decisions mutually.