Fundamentally, behavioral assumptions are used to explain other concepts related to agency relationships between the principal and the agent within agency theory. Indeed, the behavioral paradigm tries to explore and investigate the underlying thoughts and motivations of decision-making when people have to make a decision. On the other hand, the notion of a contractual paradigm is a reflection of when two parties make an agreement to form agency relationships. When the contractual relationships are formed, the principal tries to monitor the agent’s behavior with the fear that the agent will not perform effectively and efficiently, or the agent will behave opportunistically (as a result of behavioral assumptions). This, eventually, has led the principal into the creation of control mindset toward the agent.

Indeed, the contractual paradigm from the second notion illustrates how two parties form an agency relationship over one another. In simple terms, an agency relationship (a contractual relationship) consists of two people. One person (the principal) hires the other (the agent) to perform a given task. Indeed, the agency relationship takes place when an individual depends upon the action of another. The individual who performs the action is the agent and the affected party is called the principal. The agency relationship normally functions through a contract, which is often chosen and designed by the principal.Subsequently, it is the agent’s decision whether to accept the contract or not.

In the second concept, the ‘why’ question describes why there are problems in the agency relationship between the principal and the agent. The basic explanation of what causes agency problems is based upon two factors. These two factors are inherently