The Research Of Charitable Trusts’ Principal-agent Problems In China

In recent years, Charities’ developments are advancing at a rapid speed, yet at the same time, many related problems have arisen. Charities’lack of credibility and sense of responsibility; difficulties of setting up folk charities and lack of management system; official charities’lack of independence and waste of resources; the low degree of marketization compared with charities abroad.More and more scandals happened in the society. The way that how to effectively use charitable funds is the key point of the charities. Also making charitable funds safely achieve the preservation and appreciation is the important issue to carry out charity affairs.To solve the charitable problems, establishing a sound system called "charitable trust". In the current environment "charitable trust" system is much better than the charity organizations. This paper introduces the foundation why choosing the system of "charitable trust" and mature system from America. From the perspective of charitable trusts" investing strictly superior to the charity foundation, this paper illustrates necessities of the implementation of "charitable trusts".In the following part, this paper introduces the principal-agent theory. Firstly, comparing the relationship of principal-agency theory from the view of economics and laws. It points out the definition, characteristics and the basic condition of the principal-agency relationship. Secondly it introduces the adverse selection and moral hazard problems due to the principal-agency relationship. Thirdly this paper give the method to solve the problems the space the due to entrust an agent to solve the problem called "space state process"model.Finally the conclusion is that charity foundations need to set up a information-discriminating mechanism to make the separating equilibrium of the market spontaneous adjustmentsOur current system requires that the charitable organizations to be the client and the trust agents to be the trustee by means of principal-agent to invest. This paper aims to improve the current system of "charitable trust" by learning the experience from Euro-American countries, pointing out the problems of adverse selection and moral hazard bring by principal agent. The paper uses forward screening model to solve "adverse selection" and hidden information model to solve "moral hazard". Based on the research, the charity organizations should set up incentive contracts and provide salary incentives to encourage the trust agents to make good use of charitable funds. Those will help the "charitable trusts" established faster and better.