The Principal-Agent problem is basically any situation in which the principal, that is to say the person or company who has authority or has been given authority to make decisions on behalf of its client as per a business contract or a negotiated agreement, in which then the agent, that is to say the person or company contracting for said services, believes perhaps naively that both parties are aligned in purpose, when In fact, implicitly or explicitly that isn't necessarily true in many cases. For instance, you might think that your stockbroker or your financial advisor or your mutual fund management or your hedge fund manager would always be working in your best interests with the money that you have invested and entrusted with them, but in fact, that is hardly ever the actual case. People that work in financial institutions are typically incentivized by their management to increase assets under management or to increase trading velocity, not because doing so, means that your investment portfolio will perform better, but because these are often fee-based services and more fees generated by account size or activity, the more that they will in-turn, benefit.
While financial investments are a rather obvious principal-agent problem, the same problem occurs frequently with doctor-patient, lawyer-client, and employer-employee, depending upon how the setup and interaction occurs. For instance, while medical doctors most definitely provided a much needed and vital service, there are many times, when their interests are obviously conflicted, as when it comes to medicine or surgery, as the medical doctor may be incentivized by pharmaceutical companies to prescribe certain medications, as well as in elective surgery, in which doctors make money on surgeries, which may or may not be the best or most appropriate option for a patient, and even if a medical doctor believes strongly that as a professional the color of his medical advice would not differ, self-serving monetary incentives, change most people's behavior. In regards to lawyers, depending upon how the contract is structured there is a similar principal-agent problem, for instance, if the contract is by the hour, with no real limit on hours that can be billed on a given basis, most lawyers will do a very good job of billing for a lot of hours; however, on contingency fee basis, these contracts, in which, lawyers already have in mind a settlement figure that they are trying to achieve for their client, they will often prefer to work the minimum amount of hours to achieve that number, knowing that, while they could work more hours, their personal upside is probably minimal, so they choose not to do so. As for employers, usually the higher you are up on the pecking order, the more incentive that you have that more things are built and sold at a good profit margin, because your bonus and your advancement depends upon it; whereas, if employees are compensated by the hour, your strong tendency is to increase productivity by cracking a strong whip without having to come off any additional monetary inducements, or if you do, the lion's share will still be wrested the management's way.
Lots of economists like to look at the principal-agent problem as something that can be resolved, or reduced, or negated to some small or large degree, yet, the problem despite it all still exists and is quite prevalent. The fact of the matter is that when principals and agents get together and their interests are not perfectly aligned, you will have this problem, especially when each party has its own self-interest as its primary concern. One way to negate part of the principal-agent problem is to have interactions with far more transparency, far more openness, and far more disclosure in all agreements; as well as a recognition too, that a little more humility, a little more helpfulness, a little more teamwork, a little more thoughtfulness, and far less selfishness, improves the character of both the principal as well as the agent