How the Principal–Agent Problem Can Reduce Trust and Performance

The principal–agent problem describes a structural risk that arises when decision-making authority is delegated from one group (the principal) to another (the agent), and there is a perception that the two do not share identical incentives and there is a strong information asymmetry.

An information asymmetry exists when one party possesses materially more or better information than the other, particularly regarding effort, costs, constraints, risks, or trade-offs. Within organisations, this commonly occurs between leadership and specialised or technical departments—such as engineering, data, finance, legal, or operations—where work is difficult to observe directly and outcomes are not immediately attributable to individual actions.

Internally, the principal–agent problem can significantly damage team dynamics, particularly where work is complex, specialised, or difficult to evaluate externally. In such environments, informational asymmetry is greatest, and trust becomes both more necessary and more fragile.

Informational asymmetry and mistrust of specialised teams

Highly specialised departments—such as engineering, data, legal, or research teams—often become subject to heightened suspicion. Because their work is difficult to evaluate to non-specialists, leaders may struggle to assess effort, progress, or trade-offs. This informational gap can foster an implicit assumption that teams are overstating complexity, shielding inefficiencies, or resisting accountability.

A common but flawed belief emerges: that employees are incentivised to minimise workload and responsibility because compensation is largely fixed regardless of effort. From this perspective, teams are presumed to do the minimum required to satisfy formal expectations rather than maximising organisational value. While rational within a simplistic incentive model, this assumption ignores intrinsic motivation, professional norms, and the cognitive cost of complex work.

Leadership dependence and perceived risk

Paradoxically, as understanding decreases, leaders become more dependent on teams to accurately represent their challenges, risks, and priorities. This reliance increases perceived vulnerability. Leaders must trust that teams are acting in good faith and not selectively framing information to protect themselves or advance narrow interests.

This dependence can feel uncomfortable. Leaders may experience isolation from teams whose work they cannot easily interrogate or independently verify. Over time, this distance can erode confidence, particularly in high-pressure environments where accountability ultimately rests with leadership.

Breakdown of trust and adversarial dynamics

When trust weakens, organisations often respond by increasing controls, scrutiny, and formal reporting. These measures may reduce uncertainty in the short term but frequently signal distrust. Teams, sensing suspicion, may respond defensively—prioritising self-protection, strict compliance with metrics, or adversarial engagement strategies rather than collaborative problem-solving.

This breakdown increases stress on both sides. Leaders feel less informed and more exposed, while teams feel constrained, misunderstood, and undervalued. Productivity can suffer as energy is diverted from value creation toward justification, documentation, and risk avoidance.

In this way, the principal–agent problem becomes self-reinforcing: mistrust amplifies informational asymmetry, which in turn justifies further mistrust, progressively damaging internal relationships and organisational performance.