Principal-Agent Problem in Management Theory
As the reading suggested, metaphors can be a powerful tool to explain a large, complex phenomenon through comparison, where one experience can be used to explain another (Morgan, 1998). The readings on Taylor, Fayol, and Weber highlighted the different views in their development of management theory, but they all formed certain principles and metaphors to fix the issues of inefficiency in their working organizations. In particular, I was attracted to Taylor’s experience as the machine shop supervisor, in which he saw a conflict of interest between the employers and employees. The employers wanted to increase production of machines, while the management system incentivized employees to underwork. The issue was to create a better incentivized system to increase performance and the selection of workers who can fulfill the standards of the organization. In this way, Taylor gave the metaphor that management is “knowing exactly what you want men to do, and then seeing that they do it in the best and cheapest way” (Wren & Bedeian, 2009). Thus, he emphasized that both a great system and selection of competent workers were needed to effectively increase production. Indeed such systems where the manager and workers are in conflict is also known as the principal-agent problem. In this essay, I will give the issue of the principal-agent problem in the context of legislatures (agents) who are expected to provide accountability for the voters (principal). In order to do this, I will focus on the problems faced by legislatures in providing accountability and the mechanisms by which these problems are alleviated. In doing this, it should become clear that there are different ways to cope with these problems (and with varying levels of success). I will make these differences explicit and ultimately attempt to infer a more general conclusion about how different types of modern legislatures try to ensure an accountable government.
Accountability requires that the principal is able to control and impose sanctions on the agent. The extent to which voters can impose sanctions on legislators can be explored through the principal-agent model. Any legislature is essentially a body of politicians to whom the responsibility of law making has been delegated. As is the case with any delegation of authority, there is a risk that the agent (the legislator) will not faithfully pursue his principal’s (the voter’s) interests. This is known as ‘agency loss’ and is compounded by the existence of asymmetric information. In the case of legislatures, there is an information asymmetry between the agent and the principal in two ways; firstly principals do not fully understand the job at hand. Policy decisions are complicated and it is often not clear when an agent has acted in a way which is contrary to the wishes of his principals. This means that it can be difficult to assess when it is appropriate to impose sanctions (Strom, 2003). Secondly, in situations when the principal cannot fully observe the agent’s actions, he might behave in a way which is contrary to the principal’s interests. This can involve policy divergence or non-involvement to issues. Moreover since these actions go unobserved, it is difficult for the principal to control or impose sanctions on the agent.
These agency loss issues demonstrate that legislatures face accountability problems, and thus, Taylor’s time study can highlight several means by which the agency loss can be contained. Taylor’s time study entails two steps: analysis and synthesis (Wren & Bedeian, 2009). In the analysis, four methods were identified to alleviate agency loss: contract design which typically seeks to establish shared interests between principals and agents, screening and selection mechanisms which aim to sort out the good candidates from the bad ones, monitoring and reporting requirements, and institutional checks (Strom, 2003). In the synthesis stage, one can employ these methods based on the characteristics of the methods. The first of these; contract design and screening are ex ante procedures, that is, they occur before the legislator is elected, whilst the second pair are ex post. Different types of legislature employ different methods to minimize agency loss. However, before discussing the different mechanisms involved in doing so, it is worth making a more general point about the differences between agency problems in a parliamentary system and in a presidential one. In a parliamentary system there is more potential for agency loss to occur than in a presidential system. This is because of the differences in the nature of the two systems. In a parliamentary system the process of delegation involves four discrete steps; from voters to elected representative, from legislators to the chief executive and his cabinet, from the cabinet to the department ministers’ and heads. Moreover, at each link a ‘single principal delegates to one and only one agent or to several non-competing ones’ (Strom, 2003). This can be contrasted with delegation in a presidential system which is characterized by competing agents which reduces the potential for agency loss.
Another method to help alleviate the principal agent problem is political parties. Firstly they ensure that preference divergence between principals and agents is minimal. In a similar vein, political parties present clear and systematic policies and thus help to reduce the information asymmetry. Moreover, since political parties only put forward suitable candidates for election they also play an important role in the screening and selection process. However, whilst the ex ante mechanisms to contain agency loss might be fairly strong, the ex post ones are not. In many parliamentary systems, as is particularly the case in the United Kingdom, there are weak external constraints on agents. This, in conjunction with the fact that there is limited competition between agents along the line of delegation, means that accountability between elections is tenuous. This is to be contrasted with a presidential or transformative legislature. Not only is there more competition from other agents, but also the independence of a transformative legislature is often accompanied by stringent external checks. Strom points out that ‘presidential systems typically feature a policy process with both multiple principals and external checks’ (Strom, 2003). Overall, in terms of accountability, the mechanisms employed by different legislatures to solve the problem of agency loss and ensure political accountability are very different. However, I would support the interpretation that the competition between agents fostered by the line of delegation in a presidential system, in conjunction with the tendency towards more stringent rules and regulations, means that a legislature in a presidential system is likely to be more accountable than a legislature in a parliamentary legislature.
To conclude, like Taylor’s machine shop, legislatures also face several problems in ensuring principal-agent alignment. As Taylor mentioned in his Principles of Scientific Management, there is no “one best way,” rather management is a science that is “continually improving practices through scientific investigation” (Wren & Bodeian, 2009). In this essay, I analyzed the principal-agent problems of legislatures and how different legislatures each cope differently to their issue of accountability. I arrived at the conclusion that a legislature typical of a parliamentary system would perform the accountability function less well than a legislature typical of a presidential system. I feel that the principal-agent model has provided valuable insights into how legislatures can become more accountable, but also show that the principal-agent problems like management practice cannot be fully resolved, rather be only alleviated.
Works cited
Morgan, G. (1998). The Promise of Images of Organization. Images of Organization: The Executive Edition, pp. 3-13.
Strom, K. (2003). Delegation and accountability in parliamentary democracies. Oxford: Oxford University Press. pp. 1 – 30. http://www.uh.edu/democracy/stromp.pdf
Wren, D. & Bedeian, A. (2009). The Evolution of Management Thought. Danvers: John Wiley and Sons Inc., pp. 121 – 155.
Yeirang, interesting post--definitely a new direction for the readings and something to think about. It's certainly a bit different than a traditional organization where the "boss" is the principle and the "worker" is the agent. In a legislature, the representative is the agent in the sense that the people can fire him/her. Yet, the representative creates laws that the people have to follow. It's an interesting dynamic.
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