This paper deals with the principal-agent relationship, a complex function representing the relationship among different variables, and introduces the State-Space Formulation method to demonstrate its basic model and general framework. With the help of Kuhn-Tucker theory, the solution to the model is then analyzed. Afterwards, with the rural cooperative finance as an example, the application of principal-agent theory is discussed. It is con- cluded that, in the setting of risk-sharing mechanism between government and the person in charge of rural coopera- tive finance organization, the moral hazard of the person in charge and various uncertainties should be fully consi- dered. The principal-agent theory is effective in analyzing the contract relationship among different individuals and provides an approach to understanding the contract relationship.