Principal-agent Problem Research Articles

Online program management and potential principal-agent problems

ABSTRACT Enrollment pressures and other considerations spur Master of Public Administration online offerings, and specific skillsets are needed for implementation. Online program management providers (OPMs) are for-profit companies that bundle services to establish academic programs in exchange for tuition revenue sharing agreements, upfront fees, or a combination of the two. In such relationships, principal-agent problems may arise in which a company’s profit motives conflict with a university’s larger set of goals and, as a result, stakeholders should recognize the dynamic. However, the lack of industry transparency and emerging business models impede easy understanding. Analysis of contracts obtained through open records requests and other documents (a) identifies available services and (b) reveals potential problems as well as mitigation tactics. Findings contribute to our understanding of what OPM agreements entail, including the contributions made by faculty and other university personnel.

Principal–Agent Problem as a Principled Approach to Electronic Counter-Countermeasures in Radar

Electronic countermeasures (ECMs) against a radar are actions taken by an adversarial jammer to mitigate the effective utilization of the electromagnetic spectrum by the radar. On the other hand, electronic counter-countermeasures (ECCMs) are actions taken by the radar to mitigate the impact of ECMs so that the radar can continue to operate effectively. The main idea of this article is to show that ECCMs involving a radar and a jammer can be formulated as a principal–agent problem (PAP)—a problem widely studied in microeconomics. With the radar as the principal and the jammer as the agent, we design a PAP to optimize the radar’s ECCM strategy in the presence of a jammer. The radar seeks to optimally trade off the signal-to-noise ratio of the target measurement with the measurement cost: cost for generating radiation power for the pulse to probe the target. We show that for a suitable choice of utility functions, the PAP is a convex optimization problem. Furthermore, we analyze the structure of the PAP and provide sufficient conditions under which the optimal solution is an increasing function of the jamming power observed by the radar; this enables computation of the radar’s optimal ECCM within the class of increasing affine functions at a low computation cost. Finally, we illustrate the PAP formulation of the radar’s ECCM problem via numerical simulations. We also use simulations to study a radar’s ECCM problem, wherein the radar and the jammer have mismatched information.

Unpacking the public/government relationship in the context of sport events: an agency theory approach

ABSTRACT In the context of sport events, local governments are often, at least in part, responsible for bringing an event to a community and determining the extent of public funding invested. Due to the government’s role and responsibility to act in the best interest of residents, the dyadic public/government relationship is an integral part of publicly funded sport events. However, the nuances of the public/government relationship in the context of sport events have seldom been investigated. The purpose of this contribution is to offer a conceptual approach to explore the host resident/local government relationship in the sport event context. Using agency theory, we situate host residents as the principal, delegating tasks to the local government, the agent. We demonstrate how introducing concepts of knowledge, power, and trust from this perspective can determine the extent to which principal-agent problems may exist in the context of a sport event. This in turn offers insights into the political impact sport events may have in communities and how the local government can better serve host residents in this context. Methodological suggestions, such as drawing on mixed methods approaches and engaging diverse groups of research participants are offered to provide researchers the tools to apply these concepts in the context of publicly funded sport events.

International Student Revenue and International Rankings Success: A Case Study of Australian University Research Strategies

Abstract The publication of the first major international university rankings in 2003 opened up a new era in the internationalization of higher education, with universities around the world reorienting their research efforts toward securing success in international (as opposed to domestic) ranking systems. This has generated a potential principal-agency problem, as nationally-funded universities increasingly seek international validation. This opens up the possibility that a focus on rankings success might actually lead universities to implement policies that undermine their educational missions. This paper examines Australian universities’ pursuit of international rankings over the first two decades of the twenty-first century as a case study in the internationalization of higher education, with a focus on the behavior of Australia’s Group of Eight (Go8) research-intensive universities. Two major findings emerge. First, many Australian universities seem to have excessively expanded their international student enrolments as a way to generate the funds needed to compete in the ‘rankings game’. Second, many Australian universities seem to have prioritized research in fields that yield higher returns in rankings outcomes. These findings provide circumstantial evidence that Go8 universities may have compromised their educational missions in the pursuit of rankings success.

Overseas management in the English East India Company: a study of the Tonkin factory (1672-1697)

PurposeThis paper aims to investigate “corporate governance” of the English East India Company (EIC) in the late 17th century through a case study of the Tonkin factory (1672–1697).Design/methodology/approachThe paper draws upon British primary materials relating to the Tonkin factory to examine and analyze the EIC’s style of management in Tonkin (Vietnam) and Bantam (Java). Qualitative and comparative methods are applied to the analysis of reports, records and letters written by EIC staff.FindingsThe paper finds that the EIC faced principal-agent problems as it had difficulties administering its distant agents and subsidiaries in the 17th century. London was strategically weakened, both by the limiting power of regional headquarters and by its use of experienced factors. Before 1682, London failed to temper the Bantam Council’s influence, and there were serious internal conflicts and power struggles between English Tonkin employees seeking to improve their positions. After 1686, London successfully forced Madras to adopt a noninterventionist stance in Tonkin’s business, but it faced the problem of “adverse selection.”Originality/valueThis paper provides evidence from the Tonkin factory (1672–1697) to show the EIC’s governance in the perspective of the agency theory.

Why Allow Local Elections? Mobilization, Manipulation, and the Abolition of Russian Mayoral Elections

Abstract Local executives in electoral authoritarian regimes can perform important regime-sustaining functions, including by delivering votes to the ruling party at election-time. Furthermore, when local executives are themselves elected, regimes can benefit from improved legitimacy and efficiency in local government. Yet elected local executives can create principal-agent problems and increase the risk that opposition groups gain office. How do authoritarian governments manage this tension? Prior research on Russia shows that elections are used to co-opt strong local mayors, while weak mayors are replaced with appointed managers. This paper argues that strong mayors are more likely to see elections canceled if their local machine is not delivering manufactured electoral support to the national party, while weak mayors are unlikely to be targeted. This hypothesis is supported using data from 207 Russian cities, including election-forensic estimates of election manipulation. The findings improve our understanding of cooptation of local leaders in electoral authoritarian regimes.

Estimating Effects of Incentive Contracts in Online Labor Platforms

The design of performance-based incentives—commonly used in online labor platforms—can be naturally posed as a moral hazard principal-agent problem. In this setting, a key input to the principal’s optimal contracting problem is the agent’s production function: the dependence of agent output on effort. Although agent production is classically assumed to be known to the principal, this is unlikely to be the case in practice. Motivated by the design of performance-based incentives, we present a method for estimating a principal-agent model from data on incentive contracts and associated outcomes, with a focus on estimating agent production. The proposed estimator is statistically consistent and can be expressed as a mathematical program. To circumvent computational challenges with solving the estimation problem exactly, we approximate it as an integer program, which we solve through a column generation algorithm that uses hypothesis tests to select variables. We show that our approximation scheme and solution technique both preserve the estimator’s consistency and combine to dramatically reduce the computational time required to obtain sound estimates. To demonstrate our method, we conducted an experiment on a crowdwork platform (Amazon Mechanical Turk) by randomly assigning incentive contracts with varying pay rates among a pool of workers completing the same task. We present numerical results illustrating how our estimator combined with experimentation can shed light on the efficacy of performance-based incentives. This paper was accepted by Chung Piaw Teo, optimization. Supplemental Material: The data files and e-companion are available at https://doi.org/10.1287/mnsc.2022.4450 .

The principal–agent problem amid digital transformation

Despite the widespread use of digital technologies, the economic nature and essence of digital transformation remain understudied. The article examines the aspects of the principal–agent problem amid digital transformation, which implies replacing a person or analogue machines with digital technologies. Transformation is needed to gain additional economic advantages or improve the flexibility of the organization’s activities within the concept of Industry 4.0. The research demonstrates that the underlying economic reason for digital transformation is to solve the problem of information asymmetry and overcome the principal–agent conflict through the use of digital technologies. The concept of digital transformation and the principles of the principal–agent theory constitute the methodological basis of the study. Among the research methods were generalization, the inductive method of knowledge formation, and the assessment of the conclusions’ completeness with the involvement of theorists and practitioners in the field under consideration. The study allowed broadening the understanding of the principal–agent theory: establishing the roles of a human agent and a machine agent, as well as highlighting the essential economic aspects of digital transformation. The results obtained can be used to create digital transformation methodologies and research on the organization of labour in this field.

The Vast Space in Which the Vertical Merger Guidelines Lived

The thesis of this article is that the gap left by the abandoned Vertical Merger Guidelines ( VMGs) is small, and that the gap should not be filled until a sound foundation for guidelines is built. The VMGs operated with a narrow scaffolding in a vast space of real-world decisions and a continuum of organizational forms. The illustrations in the VMGs were based on pricing models that show that anticompetitive exclusion may result from vertical mergers. But these models are incapable of generalization, and they do not account for investments, market uncertainty, contracting problems, information asymmetries, and governance issues. Perplexingly, the VMGs ignored research that considers such factors and illuminates a broad range of empirically verifiable efficiencies. The requisite foundation for effective vertical guidelines is not in place. Until it is developed, replacements will fail to screen vertical mergers that do not raise concerns and will not be of assistance when mergers are challenged. Antitrust scholars could advance the foundational work by developing authoritative briefs on topics such as anticompetitive exclusion, asset-specific investments, incomplete contracts and opportunistic behavior, information asymmetries and principal–agent problems, the purposes and effects of restrictive contracts, and the implications of network economies for the scope of firms.

Designing incentive mechanism in contract farming considering reciprocity preference.

Contract farming is a growing practice in agricultural economy. A well-designed crop-planting and buyout contract, offered by an enterprise, to a fraction of contract farmers brings benefit to farmers as well as to the enterprise itself. However, in the process of contract fulfillment, farmers possess private information about the degree of effort on fulfilling the contract of themselves. Thus, the more informed farmers may not work hard in the process of planting crops. This opportunistic behavior of farmers caused by asymmetric information has seriously affected the sustainability of contract farming. An enterprise with reciprocity preference tends to make a contract both improves farmers’ welfare and brings enough profit to sustain its own operations, while a farmer with reciprocity will work hard in return for the enterprise’s reward. In this paper, we develop a non-profit index principal-agent model between enterprises and farmers, assuming both have reciprocity preference, to investigate how to design an incentive mechanism in contract farming. We begin our analysis by establishing a non-profit index evaluation system to evaluate farmers’ effort degree in contract fulfillment. Then we solve principal-agent problem with the assumption that farmers’ expected certainty income premium (ECIP) is constant. We find that in the perfect Bayesian equilibrium, farmers with higher degree of reciprocity preference require less ECIP, and will improve efforts to complete contract tasks, even actively sacrifice their own interests to repay extra rewards from enterprises. Furthermore, we explore our model to the scenario in which farmers’ ECIP is a function of enterprise payment difference (EPD). We find that the higher the degree of reciprocity preference of farmers, the greater the probability of enterprises to increase income. Numerical simulations are conducted to verify the validity of the conclusions. Our study shows that the reciprocity preference behavior of enterprises and farmers improves the fulfillment rate of contract farming, which contributes to the realization of the incentive mechanism of contract farming.

Understanding the deterrence effect of punishment for marine information security policies non-compliance

In the organizational setting of marine engineering, a significant number of information security incidents have been arised from the employees’ failure to comply with the information security policies (ISPs). This may be treated as a principal-agent problem with moral hazard between the employer and the employee for the practical compliance effort of an employee is not observable without high cost-. On the other hand, according to the deterrence theory, the employer and the employee are inherently self-interested beings.It is worth examining to what extent the employee is self-interested in the marine ISPs compliance context. Moreover, it is important to clarify the proper degree of severity of punishment in terms of the deterrent effect. In this study, a marine ISPs compliance game model has been proposed to evaluate the deterrence effect of punishment on the non-compliance behavior of employee individuals. It is found that in a non-punishment contract, the employee will decline to comply with the marine ISPs; but in a punishment contract, appropriate punishment will lead her to select the marine ISPs compliance effort level expected by the employer, and cause no potential backfire effect.

How to manage the principal-agent problem in dentistry

Evidence-based clinical decision making between a dentist and the individual patient occurs in a world of imperfect information, uncertainty, and choice. In this dentist-patient relationship, there exists an asymmetry of knowledge in which the patient seeks the dentist’s specialized knowledge, which the patient lacks, to help make decisions that will maintain or improve their oral health. Hence, the relationship between the dentist and patient must be grounded on the patient’s trusting that the dentist functions in their best interest.

Poor Performance as a Predictable Outcome: Financing the Administration of Unemployment Insurance

Effective administration of unemployment insurance (UI) is central to its ability to smooth consumption and act as an automatic stabilizer. The federal government's method of allocating funds to administer UI gives the states no incentive to provide quality service at reasonable cost. We first document the deteriorating performance of the UI system in recent recessions and present estimates of a descriptive model relating state workloads to performance. We then characterize UI administration as a standard principal-agent problem, which leads to a method of allocating funds that would motivate states to adopt new technologies and improve performance.

Examining potential biases related to brokers' cooperative commission in multi-unit residential investments

PurposeInvestors often utilize brokers to assist them in property acquisitions. These brokers are compensated through a cooperative commission, or bonus, that is publicized on the listing service. The purpose of this paper is to determine the relationship between advertised compensation packages and selling price, time-on-market and listing characteristics.Design/methodology/approachTo examine variables likely to influence earnings of the buyers' broker, this study utilizes multiple and logistic regressions. Given the range of prices found in the 196,276 listings, the data was sorted on listing price and then split into ten, approximately equal, deciles.FindingsThe explanatory power of models with cooperative commission as the dependent variable was highest in the lowest deciles with type of financing, size and distressed status being highly significant. When comparing list- to selling price the average was 96.1%. As cooperative commission increased, the higher priced parcels sold at a higher price relative to list price. This potentially justifies higher cooperative commissions or exemplifies the principal-agent problem where effort is based on potential earnings. Fixed bonuses were used predominately for parcels under $62,234, likely to provide a minimum earnings amount. However, surrounding the median, it seems they may differentiate a property.Practical implicationsThis research provides insight for practitioners on the impact of different variables, including cooperative commissions, on sale price and time-on-market. For example, cooperative commission increased for properties in the outer deciles implying that agents may be compensating for suspected difficulty. Additionally, the seasonality findings imply that agents can determine when to list and when to provide a fixed bonus to solicit attention. Results also suggest that practitioners will find it beneficial to market at an appropriate price rather than list high to create negotiating room.Originality/valueThis paper follows only one paper that covered a similar topic. However, this paper uses twenty years of multi-unit property listings from a major US city from 1996 to 2015. The focus on multi-unit properties is an effort to focus on a more sophisticated group of buyers that may be more experienced and make decisions more rationally.

Incentives, lockdown, and testing: from Thucydides' analysis to the COVID-19 pandemic.

In this work, we provide a general mathematical formalism to study the optimal control of an epidemic, such as the COVID-19 pandemic, via incentives to lockdown and testing. In particular, we model the interplay between the government and the population as a principal–agent problem with moral hazard, à la Cvitanić et al. (Finance Stoch 22(1):1–37, 2018), while an epidemic is spreading according to dynamics given by compartmental stochastic SIS or SIR models, as proposed respectively by Gray et al. (SIAM J Appl Math 71(3):876–902, 2011) and Tornatore et al. (Phys A Stat Mech Appl 354(15):111–126, 2005). More precisely, to limit the spread of a virus, the population can decrease the transmission rate of the disease by reducing interactions between individuals. However, this effort—which cannot be perfectly monitored by the government—comes at social and monetary cost for the population. To mitigate this cost, and thus encourage the lockdown of the population, the government can put in place an incentive policy, in the form of a tax or subsidy. In addition, the government may also implement a testing policy in order to know more precisely the spread of the epidemic within the country, and to isolate infected individuals. In terms of technical results, we demonstrate the optimal form of the tax, indexed on the proportion of infected individuals, as well as the optimal effort of the population, namely the transmission rate chosen in response to this tax. The government’s optimisation problems then boils down to solving an Hamilton–Jacobi–Bellman equation. Numerical results confirm that if a tax policy is implemented, the population is encouraged to significantly reduce its interactions. If the government also adjusts its testing policy, less effort is required on the population side, individuals can interact almost as usual, and the epidemic is largely contained by the targeted isolation of positively-tested individuals.

A proposal for a new type of charitable-business structure: the donor-investor organization

ABSTRACT Non-profits redistribute assets in pursuit of a social goal, and for-profits organize assets to generate income and growth. While both organizations face a principal-agent problem, non-profits face unique challenges ensuring that managers adhere to the goals of endowers or donors. Regulations have failed to successfully address the principal-agent problem, and hybrid structures such as Benefit Corporations have profit as one of the objectives. We propose a new type of entity with both a business arm and a charitable arm, with a social purpose as the only objective, committing all profits to the entity’s charitable mission. Investors, both small and large, receive a stream of future tax deductions based on outlays for the organization’s mission, while retaining legal control of the entity’s operations. While not meant to replace all charities, the proposed structure provides a new way for investors, business people and non-profit professionals to work towards a social good.

Coordination patterns reveal online political astroturfing across the world

Online political astroturfing—hidden information campaigns in which a political actor mimics genuine citizen behavior by incentivizing agents to spread information online—has become prevalent on social media. Such inauthentic information campaigns threaten to undermine the Internet’s promise to more equitable participation in public debates. We argue that the logic of social behavior within the campaign bureaucracy and principal–agent problems lead to detectable activity patterns among the campaign’s social media accounts. Our analysis uses a network-based methodology to identify such coordination patterns in all campaigns contained in the largest publicly available database on astroturfing published by Twitter. On average, 74% of the involved accounts in each campaign engaged in a simple form of coordination that we call co-tweeting and co-retweeting. Comparing the astroturfing accounts to various systematically constructed comparison samples, we show that the same behavior is negligible among the accounts of regular users that the campaigns try to mimic. As its main substantive contribution, the paper demonstrates that online political astroturfing consistently leaves similar traces of coordination, even across diverse political and country contexts and different time periods. The presented methodology is a reliable first step for detecting astroturfing campaigns.

British Travelers to the Mines of Rio de la Plata and Chile in the Aftermath of the Financial Crisis of 1825–26: Political Economy and Questions of Observation

Abstract This article focuses on work published by British travelers to Chile and Rio de la Plata who inspected mining association holdings in the region in the wake of the financial crisis of 1825–26. The travelers sought to determine whether it proved prudent to continue to direct British men, money, know-how, and equipment to the mines. They drew on the work of political economists to help establish the credibility of their observations and accounts, particularly with respect to the relationship between the lack of the division of labor and population in La Plata and Chile and prospects for future speculative investments in the mines. However, while political economists blamed the financial crisis on the uncertainty generated by the actions of the Bank of England and private banks, the commercial travelers focused on other sources of observational and representational error: principal-agent problems in the joint-stock mining associations, and the travelers' ignorance and prejudices about the region.

Bayesian agency: Linear versus tractable contracts

We study principal-agent problems in which a principal commits to an outcome-dependent payment scheme (a.k.a. contract) so as to induce an agent to take a costly, unobservable action. We relax the assumption that the principal perfectly knows the agent by considering a Bayesian setting where the agent's type is unknown and randomly selected according to a given probability distribution, which is known to the principal. Each agent's type is characterized by her own action costs and action-outcome distributions. In the literature on non-Bayesian principal-agent problems, considerable attention has been devoted to linear contracts, which are simple, pure-commission payment schemes that still provide nice approximation guarantees with respect to principal-optimal (possibly non-linear) contracts. While in non-Bayesian settings an optimal contract can be computed efficiently, this is no longer the case for our Bayesian principal-agent problems. This further motivates our focus on linear contracts, which can be optimized efficiently given their single-parameter nature. Our goal is to analyze the properties of linear contracts in Bayesian settings, in terms of approximation guarantees with respect to optimal contracts and general tractable contracts (i.e., efficiently-computable ones). First, we study the approximation guarantees of linear contracts with respect to optimal ones, showing that the former suffer from a multiplicative loss that grows linearly in the number of agent's types. Nevertheless, we prove that linear contracts can still provide a constant multiplicative approximation ρ of the optimal principal's expected utility, though at the expense of an exponentially-small additive loss 2−Ω(ρ). Then, we switch to tractable contracts, showing that, surprisingly, linear contracts perform well among them. In particular, we prove that it is NP-hard to design a contract providing a multiplicative loss sublinear in the number of agent's types, while the same holds for contracts that provide a constant multiplicative approximation ρ at the expense of an additive loss 2−ω(ρ). We conclude by showing that, in Bayesian principal-agent problems, an optimal contract can be computed efficiently if we fix either the number of agent's types or the number of outcomes.

An Analysis of the Immediate Liability Law for Building Permits via the Principal-Agent Problem

The inefficiency in the process of obtaining a building permit in Brazil can be mitigated with the approval of new laws that allow a relationship of consideration for services between the public administration and self-employed professionals, especially the architect. A Principal-Agent model is proposed to formalize possible Immediate Liability laws for building permits. The URB-Architect relationship can be formulated through the game theory, and the results following optimal policies ensure a theoretical condition of actions previously carried out by the public sector to be carried out by self-employed professionals.