The agency problem arises because of the agents' self-interest and information asymmetry, with the agent having more information than the principal.

The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in the best interest of another. This problem arises when the agent (the party making the decisions) has different goals and objectives than the principal (the party affected by the decisions), and the agent has more information than the principal.

Here are the steps to understand this concept:

1. Identify the Principal and the Agent: The principal is the party who entrusts the agent with the responsibility of making decisions on their behalf. The agent is the party who is entrusted with this responsibility.

2. Understand the Conflict of Interest: The conflict arises when the agent, driven by self-interest, does not act in the best interest of the principal. This could be due to differing goals and objectives between the two parties.

3. Recognize the Role of Information Asymmetry: Information asymmetry occurs when one party has more or better information than the other. In this case, the agent has more information than the principal. This can lead to the agent making decisions that benefit them at the expense of the principal.

4. Understand the Consequences: The consequences of the agency problem can be detrimental to the principal. They may suffer financial losses or other negative outcomes as a result of the agent's actions