Post 9 Triangle principal-agent model

This is a very interesting model which required to be covered in accounting classes, but only not triangle model. In our real life, we definitely experienced principal-agent model when we make some transactions, like stock, house, cars etc. I never thought agents may work for two principals before, which should be quite obviously if I ever take further considerations. Due to the information asymmetry, the agent may not act at the best interests of principal all the time.

Here is a true example about the triangle principal-agent model I ever experienced. 

We were going to sell an apartment which located in the commercial center. Because of the size and location, the price of this apartment is very high. There are three apartments on each floor with similar size and minor differences in structure. The structures of the left one and right one are completely reverse like a mirror image, and both apartments are around 150-meter square. In addition, the structure of the middle one would be more symmetrical in arranging the rooms, which is about 145-meter square. Since my family was planning to move into that city, we hire a property company to sell our apartment that located on the left side of the building. At the time of signing the contract, this building is still on construction. Tenants would only move in after two years when the building is completed. In this contract, we clearly stated that we will not pay for the commission and minimum price $5000 per meter square that we accept and expected price $6500 per meter square we want to sell.  We only make a down payment of contract fees. The agent would collect the commission from the buyer when they made the deal, and bonus if the agent sold the house beyond our expected price, which equals to the bid price minus expected price.

To analyze the situation, the agent wants to maximize selling price to earn more bonus. However, if the price is too high, the potential buyers could not afford it. Thus, the agent wants to make sure the price is reasonable and attractive to make sure they could sell the apartment first, and then try to maximize their own bonus part. Due to the high price, large space and severe economic downtown in China, it is really hard to find a matched buyer who is willing to buy our apartment. After two years, finally the property agent found a buyer who is capable of buying this apartment, and call our family to sign up the contract. We negotiated with a potential buyer about the price again, and then finalize the settlement date and payment methods. After sign up the contract, she needed to pay our family non-refundable deposit about 30% of total value of the apartment. When we finally decided to sign up the contract, the buyer asked us, “Just to double check one more time, you guys are going to sell apartment 301 right, in the middle of the building.” We were so surprised, “Yes, our apartment number is 301 but located in the left side of the building.” Suddenly, she realized that something must be wrong here. “Did you guys know the constructor switch the original apartment number with left side one and middle one?” Obviously, we totally had no idea since we did not follow up the news of our apartment, and rely on the property agent completely. She said, “I got it, your house is not the one I planned to buy. The deal is off.” We were so pissed off how could this kind of mistake happen. “Don’t you see the floor plan before you decide to buy the house?” She replied, “Yes, this is the question I want to ask the agent. How could it be possible you still give me a right floor plan but wrong property when signed up the contract? As a property agent, you definitely know all the updated information related to the building.” 

At this point, I hope you get the point of this example. This property agent acted both in property owner and potential buyer’ behalf to exchange information, negotiate price and set up contracts. In order to earn commission and bonus, they intentionally deceive both my family and potential buyer due to the information asymmetry. If the agent successfully deceived both of us, once buyer signed up the contract, the agent could earn commission already since the deal is done. Later on, even the buyer found out this is not the house she planned to buy, a deposit is non-refundable. She must suffer the lost on her own, and forfeit buying our apartment. Then the agent would resell our apartment again to the next potential buyer. During this deal, our family does not have any loss except wasting our time and transportation fee. At least, if could earn a non-refundable deposit as a compensation if the deal is done. The only uncomfortable part is that we still have to hire this immoral agent because our property is not selling to the buyer successfully.

To conclude, I think the triangle relationship agent would be more likely to take advantage of two principals due to the information asymmetry. Both principals are a lack of knowledge of each other and could not talk directly without the present of agents. This gave the agent enough room to play the tricky game to maximize his or her own interests. In this case, the agent is more likely satisfy our needs but sacrifice the interests of the other principals since the potential buyer is the main source of the agent’s commission and bonus. We have already paid a fixed contract fee so they could not get more benefit from us.