I was recently out to dinner with a group of my friends. We were having a great time until the check came. The restaurant informed us that in groups larger than 6 they just split the check evenly for as many people were in the group. Some members of my group were very angry because they had intentionally ordered cheaper items and were now having to pay for those who had opted for more expensive items.
Splitting the check evenly raises an instance of the principal agent problem. If looking from the viewpoint of someone on a budget (the principal) then the agent (the more affluent friend) did not have their interests aligned with the principal in terms of keeping spending low. This leads the friend trying to save money to have to pay a much higher price than the actual cost of their food. I myself am quite the eater so I feel like I am part of the problem, but I wish restaurants were able to split more evenly so I didn't feel as much guilt in these instances.
1 comment:
Though I understand your interpretation of this situation as a Principal-Agent issue, I think perhaps the concept of a negative consumption externality better fits the situation.
In your example, each of the friends is both the principal AND the agent, which is contrary to the usual one-way relationship that we observe in principal-agent situations. However, if we analyze this as a consumption externality, we can see that each person's consumption decision negatively impacts the other members of this small group (since they have to pay too), so we could say that the social marginal benefit of consumption is lower than the private marginal benefit of consumption. I think this makes it easier to consider than a multi-dimensional principal-agent issue, but I'd love to hear others' thoughts on this one.
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