Principal-agent Approach Research Articles

Foreign Debt Flows and the Credit Market: A Principal Agent Approach

As has been documented in different studies, there is a close relationship between capital flows and domestic credit. This relationship emerges from different channels, which are usually not directly identified. In this paper, a principal-agent approach is proposed in order to disentangle the distinct channels through which shocks on capital debt flows can affect credit-related variables. The model predicts that a foreign credit crunch will not only adversely affect aggregate credit, but will reduce the proportion of firms with access to intermediated funds. Using a comprehensive micro data set for the period comprised between 1999Q1-2012Q1 on foreign debt flows and the relevant credit-related variables, a VEC model is estimated to empirically validate the predictions from the theoretical framework. Results confirm that, in the short-run, a negative shock to foreign funds effectively reduces the proportion of firms with access to intermediated finance (both local and foreign), whilst at the same time induces a substitution of funding by firms from foreign to local sources, thus effectively having a positive effect on domestic credit growth. Nonetheless, the estimated long-run relationship indicates that capital debt flows and domestic credit growth are positively related. These results have important policy implications, related with the potential impact on credit (and access) generated by the use of certain macro prudential measures.

Institutions and Public Healthcare Facility Cleanliness in Nigeria: A Principal-Agent Approach

Abstract There are several reasons to believe that the level of cleanliness of a health facility adequately reflect the performance of service delivery actually received by the populace. This study extends Das Gupta et al (2004) analysis of health facility cleanliness by using the principal-agent theory and the accountability framework to assess the elements of accountability, such as voice and client power/compact; and how these impacts cleanliness of health care facilities in Nigeria. The study makes use of the available QSDS data of the World Bank in Nigeria in 2004 complemented by Focus Group Discussions (FGDs). The results show that accountability elements affect positively the health service delivery in Nigeria. Specifically, client power explains the level of cleanliness of health facility in Kogi and Lagos states. In addition, we find that staff-skill motivates cleanliness in health facilities in the two states. Put together, the results imply that community participation in health facilities must be promoted in order to enhance cleanliness in health facilities in Nigeria.

A Principal-Agent Approach to Transmission Expansion—Part II: Case Studies

This paper is the second of a two-paper series and presents a model to assess and promote investment projects defined in a plan of expansion of the transmission. We propose a model that consists of three main elements: valuation of a project based on the design of a linear contract, a principal-agent model to assess the optimal effort of an agent, and the right-of-way negotiating cost. We also define a model to evaluate bids by the agents. The value of the project depends on the number of competitors, the incentives to invest, and the right-of-way costs. The right-of-way cost is approached from the perspective of a bilateral bargaining problem.

A Principal-Agent Approach to Transmission Expansion—Part I: Regulatory Framework

Different regulatory frameworks have implemented competitive mechanisms to increase efficiency in transmission, a natural monopoly. Conflicts of interest and hidden costs make necessary to define methods to obtain an appropriate valuation of new transmission assets. This paper is the first one of a two-paper series and presents the fundamentals of transmission project valuation and cost allocation. We show the fundamentals of non-cooperative game theory, different concepts of game equilibria (Nash, Stackelberg, and Berge), and solutions to the bilateral negotiation problem (Nash bargaining solution, Kalai-Smorodinsky, and Rubinstein). In addition, the design of mechanisms, the information revelation principles, and incentive compatibility issues are described. We propose a model composed of three elements: valuation of a transmission project based on a linear contract, a principal-agent model to determine the optimal effort of an agent developing the transmission project, and the optimal bilateral negotiation of right-of-way costs. We define a method to evaluate the offers to build a transmission line project as a function of the number of agents bidding for it. The value of the project is a function of both the incentives and the valuation of the right-of-way costs. In part two of this series, we present two case studies: the IEEE 24-bus RTS and the Sistema Interconectado Central (SIC) in Chile, where we apply the methodology to a real network.

The Impact of Taxation on International Assignment Decisions – A Principal-Agent Approach

In many industries like management consulting, IT consulting, or construction highly qualified employees, i.e., experts or executive managers, have to be assigned to temporary projects. In firms with many employees and various different projects, this assignment decision involves a complex optimization procedure. Obviously, the employees’ productivities in the respective projects are crucial for the employer’s optimal assignment decision, but assignment can also be affected by risk-incentive trade-offs. Moreover, taxation can alter the assignment decision, especially if employees are sent abroad as expatriates so that international tax law has to be taken into account. To address these issues simultaneously, we combine a human resource assignment problem with a principal-agent problem of the LEN type. Both wage taxation at the agents’ level and corporate taxation at the principal’s level are integrated. We show that national tax rules as well as the methods for avoiding double taxation and the agents’ tax characteristics are important determinants for international assignment decisions. The effects of tax rate variations can be ambiguous and depend on whether the exemption method or the credit method are applied, in particular if agents make differing choices of residence. From a tax policy perspective, the exemption method should be preferred because the tax effects are more transparent than under the credit method. Special deductions for incoming expatriates have only little effects on the optimal assignment decision.

Post-Crisis Lesson for EMU Governance from the Principal-Agent Approach

This paper contributes to the ongoing debate on fiscal consolidation and the questionable effectiveness of the Stability and Growth Pact by addressing the problem of economic governance in the EMU with a game-theoretic principal-agent approach. Following the theory of delegation, we develop a principal-multi agent model where the EMU authorities act as a collective principal that designs contracts for each of two agents that reflect Europe’s ”South” and ”North.” We investigate what happens when agents face hidden-information moral hazard problem and when they are able to coordinate their actions. Bearing in mind the applicability of incentive mechanisms, we discuss the optimal contracts for the principal and each of the agents. We prove that the most efficient solution consists of tailor-made contracts, according to which highly indebted countries must be offered strong incentive mechanisms in the form of substantial penalties but also rewards (e.g., preferential loans). We also stress the importance of taking into account positive spillover effects, which could be facilitated by economic integration and fiscal policy coordination between the EMU Members.

Democratic Peace A Principal-Agent Approach

The present paper explicitly models the principal-agent relationship between a democratic population and its elected representative within a standard war bargaining setup. I find that the specific structure of this relationship and the problems resulting from it help overcome information asymmetries in crisis bargaining. This provides an alternative theoretic explanation of democracies' signaling advantage which may turn out to be more realistic than the concept of audience costs.

The Principal-Agent Approach to Politics: Policy Implementation and Public Policy-Making

The principal-agent models may be employed to elucidate central problems in interaction between principals and agents in both policy implementation and public policy-making concerning performance and remuneration. One then hits upon the double principal-agent relationships that are typical of the policy cycle, from policy-making to policy implementation and back: 1) government as principal for agents in public service delivery; 2) the population as principal for political agents under various forms of rulership.

Options for maintaining forest productivity after natural disturbance: A principal–agent approach

Historically, British Columbia mandated silvicultural outcomes on public forestland because timber had a sufficiently high value to produce high resource rents. The mountain pine beetle altered the value of pine, reducing rents and impacting the silvicultural re-imbursement of regulated practices. As a result, forest companies continuing to log stands of damaged pine seek to meet the minimum regulatory regeneration outcomes at lowest possible costs.We use a principal–agent approach to examine outcomes in the interior of British Columbia. Two mathematical programming formulations, namely, cost minimization subject to productivity goals and maximization of forest productivity subject to fixed silvicultural budgets, are used in a series of scenarios meant to highlight deficiencies in the current silvicultural funding system. We find that providing the agents with incentives to manage stand treatments in the forest, rather than solely their harvesting actions, may lead to cost savings or improvements in productivity. However, if the agents' profitability is compromised, they will seek to rely solely on natural rather than artificial regeneration, or give up forest operations on beetle-impacted stands entirely. This depends on the ability of the principal to provide agents with access to timber while incentivizing protection of living trees and regeneration of forest stands.

Institution and Public Health Care Facility Cleanness in Nigeria: A Principal-agent Approach

Institution and Public Health Care Facility Cleanness in Nigeria: A Principal-agent Approach

The Home Bias in the Sovereign Portfolios of Large European Banks

This research paper uses data disclosed in the context of the 2010 EU-wide stress test exercise to show that a substantial home bias is present in the sovereign bond portfolios of nearly all large European banks. This finding is surprising in so far as previous research papers found home bias to be a phenomenon typical for less sophisticated investors and also more likely to be observed in equity portfolios than in fixed-income ones.A four-factor model that is able to explain roughly two thirds of the home bias variance is developed. The typical home bias candidate is based in a large country with comparatively high yields, ideally a PIIGS one, and has a small and poorly diversified sovereign bond portfolio.The competence hypothesis in combination with a principal-agent approach is found to be powerful in explaining the existence of the home bias phenomenon for institutional investors.

Back to the future? The domestic sources of transatlantic regulation

ABSTRACT As each others' most important investment and trading partner, the European and U.S. American economies are closely interlinked. The growing intensity of economic interdependence has spurred the transatlantic coordination of rules and standards that could form non-tariff barriers to transatlantic commerce. But despite impressive government-to-government efforts to eliminate market barriers, the EU and the U.S. have frequently clashed over each other's regulatory policies. The aim of this special issue is to explore the domestic sources of cooperation or conflict in transatlantic regulation. The papers analyze the role of domestic factors through three theoretical lenses that are well-established in the study of multilevel systems: the principal-agent approach, the two-level game metaphor, and through a wider concept of institutionalism which emphasizes the interlinkages of societal interests and regulatory ideas with institutional frameworks. The papers reveal that domestic factors embody more obstacles to than opportunities for horizontal coordination. It is argued that transatlantic relations will likely undergo a ‘double movement’ of being simultaneously shifted upwards to become part of the global governance architecture, and downwards towards broader involvement of legislators in regulatory matters. Hence, transatlantic regulation might in the near future be more shaped by political leaders, rent-seeking interest groups and legislators than by networks of technocrats.

The Principal-Agent Approach to Testing Experts

Recent literature on testing experts shows that it is often impossible to determine whether an expert knows the stochastic process that generates data. Despite this negative result, we show that there often exist contracts that allow a decision maker to attain the first-best payoff without learning the expert's type. This kind of full-surplus extraction is always possible in infinite-horizon models in which future payoffs are not discounted. If future payoffs are discounted (but the discount factor tends to 1), the possibility of full-surplus extraction depends on a constraint involving the forecasting technology. (JEL D82)

Principals, agents, and the European Union's foreign economic policies

In the introduction to this collection on the principal–agent approach and the European Union's (EU) foreign economic policies we briefly present the EU's institutional structure for policy-making in trade, monetary, development and international competition and financial policy. We also offer some data on the extent of the EU's involvement in the international economy. Our discussion of the principal–agent approach and how it can be applied to an analysis of the EU's foreign economic policies forms the basis of the following contributions. It allows us to formulate three questions that are of particular interest for applications of the principal–agent approach to the EU. Finally, we summarize the various studies included in this collection.

The European presence in global financial governance: a principal–agent perspective

Europe is a heavyweight in global finance. But does it have a presence in global financial governance to match? This paper employs a principal–agent approach to analyse patterns of policy-making delegation in the EU to explore this question. It finds a U-shaped relationship between the extent of delegation and the ‘European presence’ in global financial governance: when member states either remain in control of policy or delegate extensive competencies, European stakeholders are well represented. In contrast, intermediate levels of delegation can undermine the European presence by tying member states' hands without sufficiently empowering supranational agents to fill the gap. Patterns of delegation are traced to the heterogeneity of member state interests and the pre-existence of international governance arrangements. These arguments about the origins and consequences of delegation patterns are supported by evidence from three core domains of financial governance: banking regulation; accounting standards; and capital market regulation.

The influences of family on the everyday business of a family firm entrepreneur

Family firms are, as the name implies, the overlapping of two big communities, ‘the family’ and ‘the firm’. Researchers from all over the world agree that the influence that a family has on the entrepreneur affects his activities. Another important point in family firms is the daily routines. In these routines, family members can get in touch with the entrepreneur. This study addresses how family firm members influence the acting of the entrepreneur. The theoretical background is based on two contrasting approaches, the principal-agent approach and the principal-steward approach. We employed the ‘diary book method’ to identify various interesting results, notably family firms tested positively to exercising the principal-steward approach and the ‘diary book method’ is an unexpected powerful research tool.

Selective Trials: A Principal-Agent Approach to Randomized Controlled Experiments

We study the design of randomized controlled experiments when outcomes are significantly affected by experimental subjects' unobserved effort expenditure. While standard randomized controlled trials (RCTs) are internally consistent, the unobservability of effort compromises external validity. We approach trial design as a principal-agent problem and show that natural extensions of RCTs—which we call selective trials—can help improve external validity. In particular, selective trials can disentangle the effects of treatment, effort, and the interaction of treatment and effort. Moreover, they can help identify when treatment effects are affected by erroneous beliefs and inappropriate effort expenditure.(JEL C90, D82)

An analysis of hospital capital planning and financing in three European countries: Using the principal–agent approach to identify the potential for economic problems

To explore differences in national approaches to hospital capital planning and financing in three European countries and to understand the roles and positions of the actors involved. Case studies of major new hospital developments were undertaken in each of the study countries (France, Sweden and England), based on a review of documents related to each development and the national framework within which they took place, as well as interviews with key informants. The principal-agent model was used, focusing on identification of differing utilities and information asymmetries. There are substantial differences between countries, for example in relation to the role of the hospital in its own redevelopment, the organisational distance between actors, the institutional level at which decision rights for major investments are exercised, and how principals control the agents. These differences have implications for the processes involved and the nature of economic and health care problems that can arise. There is evidence of, and opportunity for economic problems in all systems but these seems to be greater in France and England where the hospital leads the process, where there is limited involvement by the regional bodies, and informational differences appear greater. We conclude that hospital planning processes should be informed by an explicit understanding of the powerful groups involved and their divergent preferences and utilities.

Frank Biermann and Bernd Siebenhüner. 2009 (eds.). Managers of Global Change: The Influence of International Environmental Bureaucracies (Cambridge: MIT Press)

Managers of Global Change addresses a long-standing question in international relations scholarship: “Do international organizations (IOs) matter?” In answering this question, the authors narrow down the focus of their study to bureaucracies (IBs) within IOs. International civil servants have largely remained outside of international relations research, even though IOs have long been recognized as actors capable of autonomous action. The book centers on IBs and their influence on behavior of states and other actors and evaluates this influence systematically, using an impressive wealth of information presented in case studies. The authors begin the book with a review of the literature that has previously examined the role and effect of IOs. They note that the current state of this research leaves the study of IBs and their influence on the periphery, despite numerous studies of IOs. The authors emphasize that their framework shares similarities with two theoretical approaches that have been used to analyze IBs: principal-agent theory and sociological institutionalism. Yet, there are also important differences. One shortcoming of the principal-agent approach that the authors try to overcome is its focus on variation in IBs’ behavior stemming from differences in principal-agent relations. As a result, principal-agent theory is less useful when variation in IBs’ choices is observed under similar principal-agent relations. In addition, this approach fails to analyze the preference formation in IBs. In the case of sociological institutionalism, the authors credit this perspective for advancing the study of IBs as autonomous actors in international politics, but critique the failure to separate IBs from IOs. The authors argue that the study of IBs as autonomous agents requires a more precise conceptualization in order to distinguish the influence of IBs—groups of international civil servants—from that of IOs—institutional structures encompassing collectives of member states, normative frameworks, and IBs. Rev Int Organ (2011) 6:105–108 DOI 10.1007/s11558-010-9087-0

Impactos da participação privada no sistema prisional: evidências a partir da terceirização de prisões no Paraná

O presente trabalho objetiva discutir os impactos decorrentes da participação de atores privados na provisão de serviços de utilidade pública, tomando como referência o processo de terceirização de prisões ocorrido no Estado do Paraná. Em meio a uma perspectiva agente-principal, a partir de uma análise comparativa entre prisões gerenciadas integralmente pelo poder público e prisões terceirizadas no período de 2001 a 2006, é possível avaliar se a delegação de atividades a atores privados contribuiu para a melhoria do desempenho do sistema prisional e, por consequência, analisar a eficácia das ações engendradas. De acordo com os referenciais teóricos de suporte, as decisões estratégicas dos governos ao envolverem a participação privada no sistema prisional, implicariam a redução dos custos em detrimento da qualidade dos serviços oferecidos. No entanto, contrariando esta previsão, os resultados obtidos apontam que as unidades prisionais terceirizadas não somente apresentam menores custos como também exibem melhor desempenho em aspectos de qualidade, em relação às prisões públicas tradicionais. O estudo discute os possíveis mecanismos organizacionais que geram este resultado.