Jan wants to buy a house, but her friend Kan is a much tougher negotiator. They devise a plan where Kan will tell the seller of the house that she is Jan’s agent and will make all the decisions with respect to any purchase of the house. They also agree that Kan actually will have no such authority and that Jan is the only one who will make any decisions relating to purchasing the house. They meet with the seller, and Kan says that she is Jan’s agent while Jan says nothing. Has an agency been created? Discuss in details the pros and cons of this case.
Jan wants to buy a house, but her friend Kan is a much tougher negotiator. They devise a plan where
Kan will tell the seller of the house that she is Jan’s agent and will make all the decisions with respect to
any purchase of the house. They also agree that Kan actually will have no such authority and that Jan is
the only one who will make any decisions relating to purchasing the house. They meet with the seller, and
Kan says that she is Jan’s agent while Jan says nothing. Has an agency been created? Discuss in details the
pros and cons of this case.
Agency is defined as the ability of individuals to make free choices, independently without outside influence.
In the above situation, the agency still lies with Jan who was the primary decision maker. Jan still has final say on the sale of the house while Kan cannot independently make decisions on Jan’s belief. Thus no agency is created in this scenario as Kan has no ability to influence Jan’s final decision. There may be a few cons to not granting Kan agency in this situation as if Kan had agency, using her expertise she would probably seek out better deals as she has free reign to manipulate the deal to better suit Jan and this could have led to a better outcome for Jan. Right now Kan can only pitch what Jan approves and this can be difficult while negotiating on the spot as the seller will constantly throw new information at the buyers which must quickly be factored into the decision, if the incorporation of the new information has to constantly be vetted by a second person it can slow down the process greatly.
However, by not giving up agency Jan benefits from a lower risk of moral hazard problems. It may be possible that Kan might act recklessly as Kan is not the one who will have to spend money and suffer if the deal goes bad. Furthermore, Kan might cut a secondary deal with the seller on the side which would be beneficial to the two of them but result in a loss for Jan. Thus by not granting agency, Jan safeguards her interests.
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