This article introduces the agency theory to the field of higher education research. By applying agency theory to the inter-organisational relationship between government and higher education institutions, it is possible to illustrate general problems facing control and governance in a more theoretical and analytical way. The conceptual arsenal provided by the agency theory may benefit various research settings that are related to government-higher education institution relationships. In addition to its descriptive elements, agency theory also provides theoretical explanations for e.g. the establishment of quality assurance systems and performance-based funding procedures.