Principals in this theory are the people who are trying to convince the agent to do something. Since we are talking about allowance in this case, the parent is the principal and the child is the agent.
Let's create a scenario where the parent wants the child to take the garbage. They create an allowance amount for their child, $5 a week to take out the garbage.
- According the the "principal-agent theory" offering your child money to take out the trash implies it is an undesirable task that no one would do without being compensated for.
- And according to this theory, your child may agree to take out the trash for the $5 but will never again take out the trash for anything less than $5.
- Furthermore, the influence of the allowance tends to wear off over time. Your child may become more and more reluctant to take out the trash as time goes on, requiring more prodding on your part. They may even negotiate a higher rate when they realize the leverage they have- and you might readily agree, hoping it will extinguish the complaining and ignite quicker action!
- Or they may decide they don't need or want the money and forfeit the task.
Keeping in mind the "principal agent theory" you may decide it is easier to have your children complete chores with no monetary compensation. Household chores can instead be viewed as something each member of the family does to contribute to the health and well-being of the family. Completing chores together can help you and your children feel more connected since conversations may flow more easily when you are occupied side by side with a similar task and are working together as a team.
Children still need to learn how to manage money. Giving them a set allowance, unrelated to the completion of chores, along with some coaching about spending and saving can help them develop healthy money habits they will need sooner than you think!
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