Principal-Agent Theory Case Study

Principal-agent theory assumes that actors anywhere are governed by economic self-interest (Kassim and Menon, 2003). The question is then how principals can manage the self-interest of those empowered to act on their behalf, their agents, so that it is aligned with the purposes that the principals wish to achieve. Both conflicts of interests and the agents’ inherent access to key information are usually the sources of information asymmetry (Gailmard, 2012).
In public policy, ‘principals’ are ultimately citizens and ‘agents’ are politicians and bureaucrats, but the whole structure of a public bureau can be seen as being governed by chains of principal-agent relationships (Kassim and Menon, 2003). However, it can be argued that principal-agent

According to Gailmard (2012), there are general problems of control by principals in the public sector, resulting from the multiplicity of principals with diverse objectives, the difficulty of constructing incentives where profits do not accrue to agents, procedural constraints, and the meagerness of democratic accountability as a mechanism of regulating the behavior of the agent. It can clearly be inferred from these arguments that even in the most contemporary approaches to public sector management, the problems of principal agent relationship cannot be easily solved. As Shavell (1979) and Miller and Whitford (2002) emphasize, solving the incentive problems in the principal agent relationship needs a continuous learning and reform process. The relationship between principal and agent, according to Lane (2000), can be structured in different ways, in an attempt to overcome these problems and to motivate the agent to act in the interest of the principal. The principal-agent problem is particularly severe in the classical bureaucratic form of administration due to the inherent nature of bureaucratic complexity, monopolistic nature of agents and usually ambiguous contractual relationships (Gailmard,