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{{a|design| {{image|Secret agent problem|png|A special agent’s problem, yesterday}}}}{{dpn|/ˈeɪʤənsi ˈprɒbləm /|n}}


{{image|Secret agent problem|png|A special agent’s problem, yesterday}}}}{{dpn|/ˈeɪʤənsi ˈprɒbləm /|n}}The [[agency problem]] describes the intrinsic [[conflict of interest]] any [[agent]] working on a [[commission]] faces, and that is that as long as it gets its [[commission]], it doesn’t really care a hill of beans what its [[principal]] gets, however much it might protest to the contrary.   
The intrinsic [[conflict of interest]] any [[agent]] faces that, as long as it gets its [[commission]], it doesn’t really care a hill of beans what its [[principal]] gets, however much it might protest to the contrary.   


In a sense, this is an articulation of the [[prisoner’s dilemma]], shouldn’t surprise anyone and ''should'' be cured by repeat [[Iterated prisoner’s dilemma|iterations]]: clients have memories and will remember when you ripped them off.  
Being little more than an illustration of the [[prisoner’s dilemma]], this shouldn’t surprise anyone. It ''should'' be cured where the agency has a repetitive, undated nature:<ref>In which case the game is an [[Iterated prisoner’s dilemma|“iterated” prisoner’s dilemma]].</ref> clients have long memories and will remember when you rip them off.  


But the [[iterated prisoner’s dilemma]] has a couple of natural limits: One is that it relies on repeated interactions with an indeterminate end-point: the promise of another opportunity, on another day, to clip your ticket. When the sky is falling on your head, it looks like a final interaction, and the calculus is different.  
But the [[prisoner’s dilemma]] has some natural limits: one is that it relies on repeated interactions with no, or least an indeterminate, end-point: the promise of another opportunity, on another day, to clip her ticket keeps an agent, literally, honest. Until  the sky is falling on her head, at which point it looks like a final interaction, and the calculus is different. It is a regrettable, but inevitable, fact that agents behave differently at the [[end of days]].


Second, it takes no account of “[[convexity]]” effects: I can build up my reputation incrementally by faithfully carrying out thousands of small transactions — I can ''look'' like a consistent five-star collaborator — only to blow it on one big position. I can sell ten thousand ball point pens in utmost good faith and rub off with your money the one time I purport to sell a Ferrari.  
Second, it takes no account of “[[convexity]]” effects that can arise during an agency relationship: I can build up my reputation incrementally, faithfully carrying out thousands of ''small'' transactions — I can make myself ''look'' like a consistent, five-star collaborator — only to whip away the rug the one time I enter a big transaction. I can sell ten thousand ball-point pens in utmost good faith, but run off with the money the one time I go to sell a Ferrari.  


When that one outsized “defection” reward more than compensates for all the thousands of pennies in front of the steamroller, the normal rules don’t apply and an iterated game of prisoner’s dilemma effectively becomes a [[single round prisoner’s dilemma|single round]] game, for which the option payoff is markedly different. This is what {{author|Nassim Nicholas Taleb}} calls the “Rubin Trade”.
When that one outsized “defection” drowns out all the thousands of penny-sized collaborations, an iterated game of prisoner’s dilemma effectively becomes a [[single round prisoner’s dilemma|single round]] game, for which the option payoff is markedly different. This is what {{author|Nassim Nicholas Taleb}} calls the “Rubin Trade”.


Thus, the agency problem is the classic “[[skin in the game]]” problem: an agent gets paid, no matter what. The [[investment manager]] puts no capital up, takes a small slice of ''yours'', by way of a fee, no matter what.  
Thus, the agency problem is the classic “[[skin in the game]]” problem: an agent gets paid, ''no matter what''. The [[investment manager]] puts no capital up, takes a small slice of ''yours'', by way of a fee, ''no matter what''.  


Nice work if you can get it. A lot of people in the city can get it.
Nice work if you can get it. A lot of people in the city can get it.
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Any one of its agents is charged with protecting the principal’s interests, but two overriding considerations will inevitably take priority: (i) their wish to protect and perpetuate their own role ''as'' agent, and its accompanying income stream — their need to ''persuade the principal that their role is needed'' whether or not it ''is'' needed — no turkey votes for Christmas; and (ii) their wish to not ''fuck up'' — to demonstrate that not only is the role necessary but ''I am the best person to carry out that role''.  
Any one of its agents is charged with protecting the principal’s interests, but two overriding considerations will inevitably take priority: (i) their wish to protect and perpetuate their own role ''as'' agent, and its accompanying income stream — their need to ''persuade the principal that their role is needed'' whether or not it ''is'' needed — no turkey votes for Christmas; and (ii) their wish to not ''fuck up'' — to demonstrate that not only is the role necessary but ''I am the best person to carry out that role''.  
===Legal industry transformation and the agency problem===
==Big law and the agency problem==
The JC humbly submits that any plan to revolutionise the legal industry that does not account for the [[agency problem]] ''will fail''.
{{Who domesticated whom}}
 
==Scale==
Everyone who purports to speak for a corporation does so in a way that, above all else, does not prejudice {{sex|his}} own agency with the corporation.
Another “tell” is for the size of money at stake to be so large that even a legal bill in the tens of millions will amount to a rounding error.
 
This puts our old friend the [[drills and holes]] conundrum into perspective: it is true that a corporation desires quick, cheap and effective legal services. In many cases, it does not need ''any'' legal services ''at all'' — it could get by not just with cheaper, less fulsome legal protections, but with ''no legal protections at all''. What percentage of legal agreements are ever litigated?
 
But it is hard for an inanimate pile of papers filed at companies registry to have that sort of insight. It relies on its ''agents'' to arrive at that conclusion on its behalf. But who, amongst the byzantine control structure that those very agents have constructed to help it make decisions of that sort — its [[inhouse counsel]], [[outhouse counsel]], credit risk management, document [[negotiators]], client [[onboarding]] team, [[compliance]] or [[internal audit]] — who of these people would ever say that? And even if one did, would {{sex|he}} not be shut down by the consensus of the others?<ref>Those who don’t believe me should try proposing that you don’t need [[cross default]] in trading agreements. You will get bilateral consensus on this, in private conversations, from almost everyone; no-one will say it in public.</ref>
 
===Big law and the agency problem===
Just one can make the case that humans did not domesticate wheat so much as wheat domesticated humans,<ref>A {{author|Yuval Noah Harari}} ''bon mot'' that owes something to {{author|Richard Dawkins}}’ idea of the [[extended phenotype]], we feel.</ref> so might one argue that [[investment bank]]s did not cultivate [[big law]] firms as much as [[big law]] — oh, okay, and [[big consultancy]] — cultivated the investment banks. Our [[IB GC genealogy]] refers.
 
For there are certain pillars of bank activity — the conduct of [[litigation]] being one, the execution corporate advisory business another and let us throw in the wheel-spinning “industry” of [[industry associations]] for a third — whose conduct so depends upon, and is in thrall to, the memetic interests and commercial imperatives of law firms, to the outright detriment of anyone else involved, that it is hard to rationalise these activities other than as some kind of extended phenotype for private practice of commercial law.
 
In this view, the in-house [[legal department]] — a bank function all but unknown thirty years ago, but now so monstrous that it needs its own chief operating officer<ref>our [[history of inhouse legal]] refers.</ref> — really only exists to make life as easy as possible for the law firms to optimise recovery of recorded chargeable time.
 
[[Big law]]’s neat evolutionary trick big here is to weaponise the agency problem by imposing structural intermediation between those who ''instruct'' them and those who are, ultimately, expected to ''pay'' for them. That intermediary —agent — has no [[skin in the game|skin]] in the [[infinite game]] and only one interest: to ''keep playing''.</ref>See {{br|Finite and Infinite Games}}.<ref>
 
A second “tell” is for the size of money at stake to be so large that even a legal bill in the tens of millions will amount to a rounding error.


So, to take our three examples:
So, to take our three examples:
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Above that threshold, this no longer holds: there is a hazy interregnum where lawyers know they can be paid handsomely, indefinitely, for carrying on an argument that most likely will never get to court, let alone final adjudication.
Above that threshold, this no longer holds: there is a hazy interregnum where lawyers know they can be paid handsomely, indefinitely, for carrying on an argument that most likely will never get to court, let alone final adjudication.
====Service providers====
Especially where you are dealing with investment banks as corporate service providers, you may see this sort of clause:
{{quote|''The Agent may seek and rely upon the advice of professional advisers in relation to matters of law, regulation or market practice, and shall not be deemed to have been [[negligent]] or in [[breach of contract]] with respect to any action it takes [[pursuant to]] such advice.''}}
The airily-advanced explanation is “look, we don’t make much money from this, and we haven’t got [[skin in the game]], so we don’t want to find ourselves facing a claim when we have done the diligent thing and sought legal advice. How can we be blamed?
But your bad advice should not be someone else’s client’s problem. No one is stopping the agent getting whatever advice it wants, on its own dime, and at its own risk. It’s a free country. And no one is stopping the agent ''relying'' on whatever advice it gets. That it did get advice may even be (weak) evidence that it diligently discharged its duty and wasn’t, factually, at fault.
But if the advice turns out to be wrong and the agent can disclaim its own liability, then the lawyers it instructed — for whom the client is probably paying — don’t acquire any liability in the first place.  ''But that’s why you pay lawyers'': so they can cover the agent’s sorry arse if their advice turns out to be wrong and their client — you, kind sir — goes on the warpath.
==Legal industry transformation and the agency problem==
The JC humbly submits that any plan to revolutionise the legal industry that does not account for the [[agency problem]] ''will fail''.
Everyone who purports to speak for a corporation does so in a way that, above all else, does not prejudice {{sex|his}} own agency with the corporation.
This puts our old friend the [[drills and holes]] conundrum into perspective: it is true that a corporation desires quick, cheap and effective legal services. In many cases, it does not need ''any'' legal services ''at all'' — it could get by not just with cheaper, less fulsome legal protections, but with ''no legal protections at all''. What percentage of legal agreements are ever litigated?
But it is hard for an inanimate pile of papers filed at companies registry to have that sort of insight. It relies on its ''agents'' to arrive at that conclusion on its behalf. But who, amongst the byzantine control structure that those very agents have constructed to help it make decisions of that sort — its [[inhouse counsel]], [[outhouse counsel]], credit risk management, document [[negotiators]], client [[onboarding]] team, [[compliance]] or [[internal audit]] — who of these people would ever say that? And even if one did, would {{sex|he}} not be shut down by the consensus of the others?<ref>Those who don’t believe me should try proposing that you don’t need [[cross default]] in trading agreements. You will get bilateral consensus on this, in private conversations, from almost everyone; no-one will say it in public.</ref>


{{Sa}}
{{Sa}}
*[[Reliance on legal advice]]
*[[Stakeholder capitalism]]
*[[Stakeholder capitalism]]
*[[Drills and holes]]
*[[Drills and holes]]
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