Introduction Labor economics is an integral part of economics because it explains how the labor market functions and operates and its dynamics. The labor market is the market where workers and employees interact. This means that there are suppliers of labor and the people who need that labor. The suppliers in this case are the workers or employees and the people who demand the labor are the employers. Smith states that the principal agent relationship always occurs in the labor market where the principals entrust the agents with their businesses. (Smith, 2003 89) The principal in this case is the owner of the business and the agent is the manager who will manage the business on behalf of the owner Principal agent relationship The principal agent relationship can be defined as an arrangement or a contract between one person called a principal and the other called an agent to carry out some work. Currie and Wolpin state that a principal can be anyone who is legally able to carry out an act. Legally able means that they are mentally stable and they are not minors. An agent can be anyone who is qualified enough to comprehend the act that is being done by the principal. (Currie & Wolpin, 2001 54) The principal agent relationship is also called the agency relationship. A contract that is signed by an agent on behalf of the principal is the contract of the principal and therefore the principal has the right to exercise any term that are in the contract for example the principal can give anyone authority to perform specific or general duties. The agency relationship can be either formal where there has to be a valid contract or some writing or informal where there is no valid contract or any kind of writing that is authorizing the agent to act on behalf of the principal. The agency relationship must also be legal. This means that the agent and principal should engage in legal activities It is evident that in the principal agent relationship, the agent is acting on behalf of the principal. The agent therefore has to act under the authority of the principal. This relationship is based upon trust and loyalty from both sides but especially from the agent. The agent has to convince the principal that he will follow his instructions to the latter and that he will not be negligent when carrying out any of the works entrusted to him by the principal. Hirshleifer et al postulate that the relationship is also based on the assumption that the agent is to act ethically and therefore he will not take advantage of the task at hand for his personal gains or satisfaction. (Hirshleifer et al, 2005 169)The principal in turn should exude a lot of confidence in his agent and also act ethically. These bases will ensure that there is a strong bond, trust and understanding between the two parties and hence a fruitful relationship. The agent has an obligation to be truthful to the principal all the time and disclose all the necessary and important information that affect the business or the task at hand or any other factors that affect the agency relationship. The agent should also refrain from any activities that may harm the agency relationship The principal agent problem The principal agent problem always arises where there is misleading information or information that is not symmetrical or compl