“ Lots of risks come with big bonuses” The bursting of the real estate bubble in the United States caused the collapse of financial institutions and the bailout of banks by government institutions, with resulting in the 2008 financial crisis. One of these banks was the Royal Bank of Scotland which ran out of money. Bankers were accused of acting out of self-interest and making risky decisions. These failures will be analyzed in this essay by answering the following question: “How did agency theory contribute to the 2007 financial crisis?” Introductory, agency theory discusses the relationship in which one party, the principal, delegates to another, the principal. agent (Eisenhardt, 1989). The central idea behind agency theory is to align the interest of shareholders (principal) with that of managers (agents) through bargaining in order to maximize shareholder value. Therefore, the decision-making process is separated from the party bearing the risk; therefore problems may arise. First, the principal cannot verify whether the agent has behaved appropriately (the agent and the principal have partly disagreed)....