Principal-agent Model Research Articles

Secret Innovation

Abstract Conventional wisdom holds that open, collaborative, and transparent organizations are innovative. But some of the most radical innovations—satellites, lithium-iodine batteries, the internet—were conceived by small, secretive teams in national security agencies. Are these organizations more innovative because of their secrecy, or in spite of it? We study a principal–agent model of public-sector innovation. We give research teams a secret option and a public option during the initial testing and prototyping phase. Secrecy helps advance high-risk, high-reward projects through the early phase via a cost-passing mechanism. In open institutions, managers will not approve pilot research into high-risk, high-reward ideas for fear of political costs. Researchers exploit secrecy to conduct pilot research at a higher personal cost to generate evidence that their project is viable and win their manager's approval. Contrary to standard principal–agent findings, we show that researchers may exploit secrecy even if their preferences are perfectly aligned with their manager's, and that managers do not monitor researchers even if monitoring is costless and perfect. We illustrate our theory with two cases from the early Cold War: the CIA's attempt to master mind control (MKULTRA) and the origins of the reconnaissance satellite (CORONA). We contribute to the political application of principal–agent theory and studies of national security innovation, emerging technologies, democratic oversight, the Sino–American technology debate, and great power competition.

Microfinance institution and moneylenders in a segmented rural credit market

PurposeThe effectiveness of microfinance institutions (MFIs) in rescuing poor borrowers from “clutches of” moneylenders has been a much-debated topic over the past few decades. This paper aims to contribute by presenting a model of competition between a socially motivated MFI and profit-maximizing moneylenders when market segmentation exists.Design/methodology/approachA principal–agent model is used to characterize equilibrium conditions under scenarios where only moneylenders operate, only MFI operates and when both co-exist to pose comparative results effectively.FindingsThe authors find unambiguous benefits arising when a welfare-maximizing MFI enters the market. However, there are benefits to having local agents like moneylenders on the ground who also have informational advantages.Originality/valueTo the best of authors’ knowledge, this study is the first to evaluate the competition between MFI and moneylenders under the framework of captive and noncaptive segments with a mandatory savings requirement.

Delegation of environmental regulation and perceived corruption in South Africa

I study the drivers of a reduction in the discretionary power of environmental inspectors and the impact that such reduction has on firms’ perceptions. I examine the transition from the Air Pollution Protection Act of 1965 to the Air Quality Act of 2005 (AQA), a change from full to partial delegation of regulation in South Africa. By constructing a principal–agent model, I propose a theoretical explanation for why a society would restrict environmental inspectors’ discretionary power. I then use my theoretical model to discuss the air quality regulation transition in South Africa. I suggest that the transition might have occurred because of increases in inspectors’ rent-seeking motivation and capacity of appropriating rents after the end of Apartheid. Using microdata, I run difference-in-differences models in a two-period panel with 191 South African firms to show that the implementation of the AQA decreases affected firms’ perceived corruption, but does not change perceptions on obtaining licences and on the functioning of courts. My work indicates that national governments in developing countries should consider the characteristics of the agents who are implementing regulation, and the system they are embedded in, when designing environmental regulation.

Green electricity product menu design for retailers without knowing consumer environmental awareness

Adverse selection problem due to asymmetry of consumer environmental awareness (CEA) could reduce electricity retailer's profit and obstructs renewable energy (RE) consumption. This study analyzes mechanism design problem of retailer constricted by RE consumption quota to incentive consumers display true CEA in competitive retail market. Based on principal-agent theory, we develop an extended principal-agent model with the addition of an RE consumption quota constraint to design a green electricity product menu which includes the green level, the price and electric quantity. Influence of information symmetry and quota setting on product attributes, retailer's profit, consumer utility, RE consumption is analyzed, and results show that: (1) Compare to symmetric information, under asymmetric information, green level of product provided to consumers with CEA (denoted as C1) distorts upward, information rent is greater than zero when quota is large, while green level of product provided to consumers without CEA (denoted as C2) distorts downward, with no information rent. (2) Under asymmetric information, unit environmental premium (UEP) of green electricity positively relates to proportion of C1, CEA level, and incremental WTP, and reaches the maximum value at a certain quota. (3) Under asymmetric information, retailer's profit and RE consumption positively relates to proportion of C1, and CEA level. (4) Under asymmetric information, quota difference could contribute to improve retail service quality under competitive retail market, and RE consumption elevation.

A Study on the Design of Incentive Contracts for Platform Economy Regulation Based on Dual Principal–Agents

A system of incentives can be established to encourage several parties to unite as a community of interest and become jointly committed to the platform economic governance. The platform economy involves progressively more complex subjects of interest and relationships, which are not the typical principal–agent one-time cooperative relationship. This study investigates the problem of regulatory incentives in the platform economy, specifically focusing on the relationship between the government, platform enterprises, and merchants. It analyzes this issue under conditions of asymmetric information by constructing and solving a dual principal–agent model. The findings indicate the following: (1) the government’s incentives and regulatory mechanisms can be considered as interchangeable to some extent, with decisions made by evaluating their respective costs; (2) the government’s optimal incentives and regulations ultimately shape the self-regulatory behavior of merchants through platform enterprises; and (3) the optimal level of incentives for both the government and the platform enterprise is influenced by factors such as the ability coefficient, the social transformation coefficient, and the merchants’ reliance on the platform enterprise. Additionally, the optimal effort level of the platform enterprise and the merchants increases with higher levels of the regulatory effort, risk sensitivity coefficient, and ability coefficient. A win–win scenario and a long-term, stable cooperative partnership can be reached by the three parties under the ideal incentive intensity. The study’s conclusions can serve as a theoretical foundation and support for the creation of incentive contracts for platform economy regulation.

Sustainable Collaboration and Incentive Policies for the Integration of Professional Education and Innovation and Entrepreneurship Education (IPEIEE)

The Integration of Professional Education and Innovation and Entrepreneurship Education (IPEIEE) has been recognized as an important direction for the development of higher education in enhancing the innovation and entrepreneurship awareness and ability of college students. However, universities and teachers are facing challenges while promoting IPEIEE, namely, various stakeholders, the unreasonable design of the curriculum system, and the lack of relevant incentive policies. In addition, IPEIEE in many universities has been placed on hold. Few studies have examined the innovation regime in IPEIEE, despite it being a dilemma that the field confronts. Thus, taking into account the roles of universities, teachers, and students in the evolutionary game model, this paper firstly constructs an evolutionary game model for teachers and students, in which the costs and parameters affecting the benefit matrix, as well as the stability strategy, are refined. Secondly, the behavior of universities is introduced to examine the effects of universities on strategic choices of teachers and students. Finally, a mechanism analysis is conducted in combination with the principal–agent model to gain a deeper understanding of the evolutionary stability of stakeholder strategies in the IPEIEE. The findings emphasize potential Evolutionary Stable Strategies (ESS) that universities, as promoters and guides, should take as measures concerning both economic encouragement and management encouragement to promote IPEIEE, so as that the ‘ideal state’ can be achieved. Furthermore, if specific incentives for different stakeholders are proposed and set at an appropriate intensity, this will encourage active cooperation among these stakeholders. This paper explores the evolution mechanism of innovation strategies in IPEIEE from the perspective of stakeholders, offering a better comprehension of the dynamic evolution of these strategies. The key findings also offer support for policymakers to promote the mutual development of agents in the IPEIEE, thus enhancing the overall sustainable collaborative capability of the IPEIEE.

Incentive and Supervision Mechanism for Operation and Maintenance of Mega Railway Infrastructure Based on Principal-Agent Theory

This study incorporates fairness preference theory into the principal-agent model to address the challenges arising from information asymmetry between the government and railway infrastructure operation and maintenance (O&M) companies. It develops an incentive and supervision model for the management of mega railway infrastructure operations and maintenance, considering two perspectives: full rationality and fairness preference. The models are compared and analyzed, exploring the costs of government supervision and the changes in expected benefits when equity preference is taken into account. The conclusions are supported by numerical examples and visual analysis, illustrating the impact of different variable parameters on the behavioral strategies of the government and O&M companies. The findings demonstrate that a well-designed incentive and supervision mechanism can effectively regulate the behavior of railway infrastructure O&M companies. The effort level of O&M companies is positively correlated with the intensity of government incentives and supervision. Moreover, from the perspective of fairness preference, transferring some financial benefits from the government to O&M companies not only increases their extra effort but also reduces government’s supervision costs, while the government’s expected utility gain depends on the strength of “reciprocity” exhibited by O&M companies.

Transnational intra-party dynamics on European democratic reforms

One of the core elements of the European Union's (EU) democratic deficit is the lack of a genuine supranational political competition. Some processes were intended to mitigate these effects, such as the introduction of the Spitzenkandidaten (SK) and the possibility of creating Transnational Lists (TL) for European Parliament (EP) elections. These processes would be accompanied by a strengthening of the role of the European political parties (henceforth, Europarties) as the only transnational party federations capable of mobilising their national members in decisions beyond the EP. Europarties would thus be able to promote transnational candidates to the European institutions and become true political parties at the EU-level. However, Europarties are heterogeneous organisations of national parties, where ideological dynamics of these transnational parties can be subject to party dissidence, with differentiated positions on European democracy during EU elections. By adopting a principal-agent model of party organisation, the aim of this research is to analyse what effects did Europarty internal dynamics have had on the creation of a common position on the SK and TL. Based on evidence from Europarties, we suggest that supranational intra-party dissidence is low regarding EU democratic reforms.

Tournaments and contracts under asymmetric information

In a principal–agent model, we compare tournament and contract schemes, which are both common methods of inducing effort. We assume that an agent’s type, which was private prior to contracting, becomes public during a tournament due to players’ interactions. We show that first-best effort levels can always be achieved in an efficient tournament scheme (ETS), where each agent can upgrade the prize by paying a fee to the principal. Furthermore, we provide sufficient and necessary conditions for the ETS to generate a higher payoff for the principal than the optimal contract scheme (OCS), with examples under mild conditions. In the absence of performance shocks, we provide a rationale for using a combination of tournaments and contracts in the presence of asymmetric information.

The Role of the Principal-Agent-Client Model in Understanding Corruption in the Public Procurement Sector in Malaysia

Corrupt practices in public procurement in Malaysia are explained in this paper using a principal-agent model. The government leaders, who are typically politicians, ministers, or their relatives, are referred to as the" principal" while the officials who carry out their duties are referred to as "agents". The actors in the model who constitute the third party — the other actor in the cycle of corruption — include clients, customers, and the public at large. The principal-agent-client framework was applied to 18 selected corruption cases in Malaysia to describe and analyse the actors involved in the transgressions and illegal acts in these cases. The cases were investigated by the Malaysian Anti-Corruption Commission (MACC) from 2014 to 2019, charged and found guilty by the courts in Malaysia. The findings show that all the actors in the role of agent were public officials, while the actors in the role of client were from the private sector, and the actors in the role of principal were high-ranking government officials, their relatives, and politicians.

Contractual Mechanisms in National Park Management: A Multi-Task Principal–Agent Model

In the management of national parks, the principal–agent relationship is key to efficient and effective management. Based on multi-task principal–agent theory, this study examines the dual functions of central government incentives and guidance and the objectives of local National Park Administration offices in environmental conservation and reasonable resource utilization. First, this study constructs a multi-task principal–agent model for central and local governments within the national park management system and identifies effective contractual mechanisms. Second, this study examines the relationship between the intensity of central government incentives and the ecological conservation atmosphere coefficient. Third, by integrating the three stages of national park management system advancement, this study explores the central government’s incentive strategies at different stages. The findings indicate that local governments receive limited ecological conservation support, underscoring the need for long-term central government incentives. The findings also confirm that the effective management of national parks by local governments can only be achieved by eliminating external uncertainties, reducing the variable costs of innovative advancements, and controlling risk aversion in local National Park Administration processes. In addition, this study includes empirical data for sensitivity analyses to understand the robustness of the model under different scenarios. This study offers valuable insights and practical suggestions for enhancing national park management.

Motivating Loyal Bureaucrats in Sequential Agency

Abstract We study a principal–agent model in which a legislature and a bureaucrat sequentially play the principal’s role. In the first stage, the legislature offers a menu of transfer payments to the bureaucrat for implementing a public project. In the second stage, the bureaucrat offers a menu of the project attribute levels to the legislature. Then, the legislature decides whether to go forward with the project and aggregates information on the public’s valuation of the project. The key trade-off in this paper is information versus the bureaucrat’s loyalty. We show that when the bureaucrat is loyal enough to the public, taking advantage of his loyalty requires inducing him to make his decision independent of the public’s valuation.

Shaping Incentives through Measurement and Contracts

ABSTRACT I study productive activity, measurement, and compensation in a principal agent model that relaxes common restrictions on the action set of the agent, the distribution of performance measures, and the shape of the wage schedule. The solution to this relaxed problem unifies insights from extant theory and shares features with well-known empirical phenomena. In particular, the optimal outcome distribution has a kink, optimal measurement is conservative, and optimal wages ensure congruent incentives and resemble accounting-based bonus plans featuring a floor, hurdle bonus, incentive zone, and ceiling, with thresholds that may reference other performance measures. Beyond these specific insights, the paper provides a flexible framework for studying how incentives are shaped through measurement and contracts.

The effects of teacher tenure on productivity and selection

I examine productivity and selection effects of K-12 teacher tenure by leveraging variation from New Jersey’s TEACHNJ Act, which extended the pretenure period. Using a difference-in-differences design, I evaluate the productivity effects of tenure by comparing fourth-year tenured and pretenured teachers. I find math value-added declines but English language arts value-added and ratings remain unchanged. Focusing on labor market effects, I compare teachers hired before and after TEACHNJ within the same district and experience level. TEACHNJ disproportionately increased male and Black teacher turnover, as the policy was tied to subjective evaluation criteria. TEACHNJ did not impact the quality of the teacher labor market as measured by value-added, though higher rated teachers often filled new vacancies. This matches principal–agent models where schools only use ratings to guide personnel decisions. Overall, tenure generates small declines in math value-added, while reforms tied to subjective evaluations disproportionately increase male and Black teacher turnover.

A principal-agent analysis of inter-agency cooperation in EU border management

ABSTRACT In the wake of the 2015 Migration Crisis, the European Union has embarked on an extensive process to reinforce external border controls and make horizontal cooperation between EU agencies critical. This article leverages the principal-agent model to elucidate the impact of inter-agency cooperation on agency autonomy and, by extension, the management of the EU’s external borders. The findings reveal that inter-agency cooperation leads to a situation in which the participating agencies enjoy more room for manoeuvre than originally granted by the EU legislature. This research sheds light on the proactive efforts of the concerned agencies in working alongside their counterparts to bolster their institutional standing and policy turf, thereby fuelling the institutionalisation of joint implementation in EU border management.

Factors associated with the enrollment of commercial medical insurance in China: Results from China General Social Survey.

The Chinese government has been promoting commercial medical insurance (CMI) in recent decades as it plays an increasingly important role in addressing disease burden, health inequities, and other healthcare challenges. However, compared with developed countries, the CMI is still less fledged with low coverage. This study aims to explore the factors associated with enrollment in CMI, with regards to explicit characteristics (including sociodemographic characteristics and family economic status), latent characteristics (including social security status), and the global incentive compatibility index (including health status), to inform the design of CMI to improve its coverage in China. Based on the principal-agent model, we summarized and classified the factors associated with the enrollment in CMI, and then analyzed the data generated from the Chinese General Social Survey in 2015,2018 and 2021 respectively. A comparison of factors regarding sociodemographic characteristics, family economic status, social security status, and health status was conducted between individuals enrolled and unenrolled in CMI using Mann-Whitney U test and Chi-square test. Binary logistic regression analysis was used to explore factors influencing the enrollment status of CMI. Of all individuals, the proportion of enrolled individuals shows an increasing trend year by year, with 8.7%,11.8% and 14.1% enrolled in CMI in 2015,2018 and 2021, respectively. The binary regression analysis further suggested that the factors associated with the enrollment in CMI were consistent in 2015,2018 and 2021.We found that individuals divorced, obese, who had a higher level of education, had non-agricultural household registration, perceived themselves as the upper social status, conducted daily exercise, had more family houses, had a car, had investment activities, or did not have basic health insurance were more likely to be enrolled in CMI. We identified multidimensional factors associated with the enrollment of CMI, which help inform the government and insurance industry to improve the coverage of CMI.

EXPRESS: Group or Individual Sales Incentives? What Is Best for Brand-Managed Retail Sales Operations?

This research studies sales force incentive compensation in Brand-Managed Retail (BMR) operations, which are particularly prevalent in high-end department stores and vertically integrated retailers. In particular, the research explores how a brand’s strength may affect the relative benefit to a brand from using individual versus group incentives for motivating its salespeople in BMR settings. The authors investigate this issue using a theoretical principal-agent model consisting of a risk-neutral firm employing multiple risk-averse salespeople. Interestingly, they find that a group incentive is more beneficial to a weaker brand than to a stronger one. Furthermore, the authors find empirical support for their theoretical findings from an analysis of sales compensation data from BMR operations in two different settings. The research findings suggest that managers should factor in the brand’s strength when deciding on the optimal salesperson compensation structure in BMR settings.

Perishable food supply chain contract with asymmetric freshness information

Food suppliers and retailers are grappling with challenging pricing and operational policies due to the deterioration of product quality over time. This problem is exacerbated by the food supplier’s intentions to provide false information about the freshness of the food. A principal-agent model optimisation for food retailer pricing is constructed to anticipate asymmetric freshness information from the food supplier. This study introduces novel modelling by incorporating a quality deterioration function with information asymmetry in case the food supplier attempts to conceal information about the freshness of the food. Retailers should charge non-discriminatory and low wholesale prices to encourage food suppliers to report their less fresh food. Overall, the supplier’s benefits are decreased when they decide not to share information regarding food freshness. However, the supplier remains profitable when the retailer believes in the less fresh food condition based on the contract design.

How regional attitudes towards immigration shape the chance to obtain asylum: Evidence from Germany

Abstract Asylum recognition rates in advanced democracies differ not only across states but also vary within them, translating into fluctuating individual chances to obtain protection. Existing studies on the determinants of these regional inequities typically rely on aggregate data. Utilizing a German refugee survey and leveraging a quasi-natural experiment arising from state-based allocation rules tied to national dispersal policies, we test two explanations for the perplexing regional differences. Drawing on principal–agent models of administrative decision-making, we test whether asylum decision-makers consciously or unconsciously comply with regional political preferences between 2015 and 2017 in Germany, one of the major European destination countries for refugee migration. We furthermore explore whether such biased decision-making amplifies in times of organizational stress as suggested by the statistical discrimination theory. Using mixed-effects logistic regressions, our analyses confirm a lower approval probability in regions with more immigration-averse residents or governments. We cannot confirm, however, that this association is mediated by high workloads or large knowledge gaps. Our results thus suggest that regional political biases affect the individual chance of asylum-seekers to obtain protection irrespective of temporal administrative conditions.

Benefit distribution of guaranteed water saving management contract based on principal-agent theory

Aiming at benefit distribution of guaranteed water saving management contract (WSMC) projects, principal-agent theory is used to propose benefit distribution scheme. Firstly, principal-agent models are established in two cases: (1) the water user and WSCO are risk-neutral; (2) the water user is risk-neutral, while WSCO is risk-averse. Then the models are solved by the backward induction method under symmetric information and asymmetric information. The models' results are analyzed and the results show that (1) WSCO's benefit distribution proportion is negatively correlated with effort cost coefficient, risk aversion degree and project uncertainty; (2) the water user's expected utility is positively correlated with project investment scale and WSCO's water saving capacity; (3) WSCO's risk aversion will reduce the water user's expected utility; (4) incentives are only required when WSCO's effort is unobservable. Finally, numerical examples are used to show the above results' rationality and suggestions are given for the water user and WSCO.