Agency problems at firms arise when the managers (agents) do not act in the interest of the shareholders (principal).

For example, the CEO may decide to use corporate cash to purchase a private jet instead of distributing an extra-dividend to shareholders. Shareholders do not have full information about what is happening at the company. At the same time, managers can make decisions that benefit themselves instead of the stakeholders (including the shareholders). The corporate inefficiencies that are associated with the conflict of interests between management and shareholders are called agency costs.