Residual loss (agency)
Residual loss in agency theory is the reduction in the principal’s welfare that remains because the agent’s decisions still differ from those that would best serve the principal, despite monitoring and bonding arrangements. It is one component of agency costs, alongside monitoring and bonding expenditure. The concept concerns unresolved divergence of interests, not every financial loss left after insurance or every residual business risk.
Worked example
Owners introduce reporting and incentives, but a manager still rejects a worthwhile long-term project to protect a short-term bonus. The value sacrificed through that remaining divergence illustrates agency residual loss.
Common mistake
Do not use residual loss as an exact synonym for residual risk or uninsured loss. State the agency context.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | SBL | Supporting | September 2026–June 2027 |