Principal-Agent Theory Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

Principal-agent theory is based on a hierarchical notion of political relationships that traces back to the politics-administration dichotomy first enunciated by Woodrow Wilson in 1887. Politics involves deciding who gets what, while administration deals with how—and arguably, when—it is delivered. For Wilson, at least rhetorically, the solution was simple: separate politics from administration, and develop a science to guide administrative matters. The reality, which Wilson recognized, is that administration requires grants of discretion, is often hard to monitor, and translates into political power. Principal-agent theory is thus interested in identifying the conditions under which agents, those who administer programs, can be expected to act as faithful instruments of political principals. Because those who decide the answer to political questions are often not those who administer the programs, agency—defined as “acting for”—is at the heart of principal-agent relations.

Originally developed in microeconomics, like theories of the firm and transaction cost economics, agency theory focused on shirking (or not working) by agents. Shirking was attributed to either of two possibilities: adverse selection, which involves choosing an agent that lacks the skills or resources required to complete the assigned task; or moral hazard, which involved choosing an agent whose goals were in opposition to the principals. In economics the central concern involves minimizing the cost of information acquisition so that one can avoid either adverse selection or moral hazard, or both. In adapting to fit the interinstitutional dynamic in a political setting, the primary focus has been on explaining and minimizing problems associated with moral hazard, while studies of elections and judicial selection tend to focus on adverse selection. As Terry Moe explains, adverse selection focuses on picking the right agent for the job, while moral hazard involves controlling agents after the selection process. This later task is particularly difficult, since it is often hard to determine what agents are doing and if their actions result in goal achievement.

Control Efforts: The Principal Side Of The Model

Some of the earliest efforts to use a principal-agent approach in political science involved those interested in investigating the conditions conducive to congressional control of bureaucracy. Early studies married agency theory with formal models to demonstrate that control is possible through a combination of police patrols in which congressional committees acted as overseers when engaged in oversight, or through fire alarms in which interest groups called congressional attention to bureaucratic drift. Critics of these studies used a combination of empirical work and formal models to demonstrate congressional control was far from certain, suggesting a number of factors unique to the political realm complicated the effort to apply agency theory in a political setting.

The efforts to develop a more accurate depiction, and parsimonious theory, focus on both the principal and agent parts of the model. On the principal side, the first modification includes multiple principals, notably the president, but also the courts and interest groups. With the addition of multiple principals, there is recognition that agent actions not in accordance with a particular principal’s goals might not involve either moral hazard or adverse selection, but instead result from agent responsiveness to a rival principal. Rather than emphasizing control, recognition of the existence of multiple, often times competing, principals moves the discussion to an investigation of the conditions under which the influence of agent’s action are possible. These studies conclude that influence is a product of both issue salience (i.e., how visible an issue is and who pays attention to it), and issue complexity (i.e., how technically complex the issue is and how complicated the tasks required to realize goals are).

Quite simply, high salience issues have the potential to involve more principals, who in turn send mixed signals to agents. On the other hand, highly complex issues tend to limit participation and often result in greater levels of discretion granted to agents. The recognition that salience and complexity vary over time, and present different types of agency problems, also attracted the attention of those who are more interested in modeling the agent part of the model.

Understanding Motivation: The Agent Side Of The Model

On the agent side, those who study bureaucracy insist that understanding agent motivation is the key to explaining why bureaucracy does what it does. The argument, in brief, is that bureaucratic actions are a product of a combination of factors—self-interest, previous experience, professional training, organizational culture, and clientele influence. An agent’s choice of activity is more complex than simply choosing between the option of working or shirking borrowed from microeconomics. The choice to work, leisure shirk, dissent shirk, or engage in sabotage is a product of individual motivation, conditioned by the organizational and political setting. While most agents work, the possibility of leisure shirking fits well into the economic-based model. The latter two options—dissent shirking and sabotage—recognize that when agent goals clash with what they are being asked to do, they can choose to slow down their work effort (dissent shirk), or actually pursue a course of action designed to realize goals diametrically opposed to those of a particular principal (sabotage). Focusing on bureaucratic motivation suggests adverse selection is a potentially significant problem in agency.

A Problem By Design

In the end, agency is especially bothersome because so much of what agents do, and the effects of what they do, is hard to determine. James Q. Wilson suggests that there are really four agency problems, distinguishable by whether a principal can monitor the outputs (work) or outcomes (results) of agent actions. William Gormley and Steven Balla propose that principals need to employ a mix of screening mechanism, institutional design, and oversight to mitigate these problems—but conclude all involve shortcomings if the goal is to achieve perfect control. This arrives back at the starting point, a principal’s delegation of authority to an agent is at heart problematic, but also an unavoidable feature of any political system.

Bibliography:

Brehm, John, and Scott Gates. Working, Shirking, and Sabotage. Ann Arbor: University of Michigan Press, 1997.
Calvert, Randall, Matthew D. McCubbins, and Barry R.Weingast. “A Theory of Political Control and Agency Discretion.” American Journal of Political Science 33, no. 3 (1989): 588–611.
Golden, Marissa Martino. What Motivates Bureaucrats? New York: Columbia University Press, 2000.
Gormley,William T. Taming Bureaucracy. Princeton: Princeton University Press, 1986.
Gormley,William T., and Steven J. Balla. Bureaucracy and Democracy. Washington, D.C.: CQ Press, 2008.
McCubbins, Matthew, Roger Noll, and Barry Weingast. “Administrative Procedures as Instruments of Political Control.” Journal of Law, Economics, and Organization 3, no. 2 (1987): 243–277.
McCubbins, Matthew, and Thomas Schwartz. “Congressional Oversight Overlooked: Police Patrols versus Fire Alarms.” American Journal of Political Science 28, no. 1 (1984): 165–179.
Meier, Kenneth J. Politics and the Bureaucracy: Policymaking in the Fourth Branch of Government. Monterey, Calif.: Brooks/Cole, 1987.
Mitnick, Barry. “The Bureaucrat as Agent.” Paper presented at the 1984
Annual Meeting of the American Political Science Association, Washington, D.C., August 30–September 2, 1984.
Moe,Terry. “An Assessment of the Positive Theory of Congressional Dominance.” Legislative Studies Quarterly 12, no. 4 (1987): 475–525.
“The New Economics of Organization.” American Journal of Political Science 28, no. 4 (1984): 739–777.
Ringquist, Evan J., Jeff Worsham, and Marc Allen Eisner. “Salience, Complexity, and the Legislative Direction of Regulatory Bureaucracies.” Journal of Public Administration Research and Theory 13, no. 2 (2003): 141–164.
Weingast, Barry R. “Bureaucratic Discretion or Congressional Control? Regulatory Policy Making by the Federal Trade Commission.” Journal of Political Economy 91, no. 1 (1983): 765–800.
“The Congressional-bureaucratic System: A Principal Agent Perspective (with Applications to the SEC).” Public Choice 44, no. 1 (1984): 147–191.
Wilson, James Q. Bureaucracy. New York: Basic Books, 1989.

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