Principal-agent Problem Research Articles

Will the EU Taxonomy Regulation Foster a Sustainable Corporate Governance?

EU securities regulation has established a taxonomy of environmentally sustainable activities. This article discusses, from a law and economics standpoint, the potential of this taxonomy to support a sustainable corporate governance. Corporate governance can be an efficient way to channel investor preferences towards sustainability because the concentration of institutional shareholding has lowered the transaction costs of shareholder action. However, there is a principal-agent problem between institutional investors and their beneficiaries, which depends on greenwashing and undermines a sustainable corporate governance. This article argues that introducing environmental sustainability into EU mandatory disclosure aligns the institutional investors’ incentives with the interest of their beneficiaries and may foster the efficient inclusion of sustainability in corporate governance. The argument is threefold. Firstly, the EU Taxonomy may curb greenwashing by standardizing the disclosure of environmental sustainability. Secondly, this information may become salient for the beneficiaries as the same standards define the sustainability preferences to be considered in recommending and marketing financial products. Thirdly, sustainability disclosure prompts institutional investors to compete for sustainability-minded beneficiaries. Being unable to avoid unsustainable companies altogether, institutional investors are expected to cater to beneficiaries’ preferences for environmental sustainability using voice instead of exit.

EFFICIENCY, LEGITIMACY, AND THE ADMINISTRATIVE STATE

AbstractThis essay examines certain epistemic problems facing administrative states’ efforts to draft efficient regulations for their societies. I argue that a basic feature of the administrative state’s authority, namely its monopoly over the production of legally binding rules for all members of a geographically defined society, creates epistemic problems that impede efficient rule-making. Specifically, the administrative state’s monopoly over the production of legally binding rules prevents multiple public policies from being simultaneously implemented and compared. The resulting singularity of administrative states’ regulatory decisions prevents observation of the counterfactual effects of policies that were possible but which were not implemented. The absence of observable policy counterfactuals frustrates efforts to assess the efficiency of administrative states’ decisions, as it is impossible to determine whether different policies would have generated greater benefits at lower cost than the policy the state implemented. As these epistemic problems are derived from the singularity of administrative states’ decisions, they exist independently of principal agent problems, suboptimal incentives, or the preferences and capabilities of administrative personnel.

Sustainable Control of Active Systems: Decentralization and Incentive Compatibility

Abstract Incentive compatible and strategy-proof mechanisms are designed for a set of Principal-agent problems under side payments. These mechanisms decompose the interaction of agents and allow the Principal to solve the incentive problem and the planning problem independently, reducing them to common optimization problems. The proposed mechanisms ensure agents communicate reliable data and execute plans. The use of these mechanisms may facilitate accounting of ethical and social aspects in organizational systems.

Impact of board size and ownership concentration on agency costs: evidence for Croatian companies

The main objective of this research paper is to examine the impact of board size and ownership concentration, representing corporate governance mechanisms, on agency costs in large Croatian companies. Furthermore, debt financing and firm growth are examined because those variables also have impact on agency costs. Agency theory defines a framework for the potential issue of the separation of ownership and management as well as for the conflict between stakeholders (principals) and managers (agents). The most significant principal-agent problems are agency costs, but they do not have a directly quantifiable value; hence, in this research paper, the asset turnover ratio is used as the approximation. Therefore, this research will empirically test the significance of the impact of board size, ownership concentration, debt financing and firm growth on agency cost in the observed period from 2014 to 2018 using panel data analysis. This research was conducted with large Croatian companies using data and information from official annual accounts primarily to ensure objectivity, standardization and comparability. Specifically, the analysis was conducted on 219 companies operating in two main categories of economic activity: Manufacturing (C) and Wholesale and retail trade (G). The results indicate that board size has a significant but negative impact on agency costs. The results also indicate that debt and growth have a significant and negative impact on agency costs. Ownership concentration was not found to have significant impact.

Incentivizing by example and money

Leaders are role models that affect their employees’ efforts. The effect depends on how much an employee identifies with the “boss”. Since this degree of identification is private information of the employee, additional financial incentives must be provided. Therefore, we study a principal-agent problem in which the principal affects the agent’s effort by her own effort and by financial incentives. The resulting principal-agent problem has a few non-standard specifics such as: (i) bilateral externalities as the principal’s effort affects the agent and vice versa and (ii) endogenous reservation utility of the agent. Combined, this leads to non-trivial and interesting contracts.

Dynamic Multiagent Incentive Contracts: Existence, Uniqueness, and Implementation

Multiagent incentive contracts are advanced techniques for solving decentralized decision-making problems with asymmetric information. The principal designs contracts aiming to incentivize non-cooperating agents to act in his or her interest. Due to the asymmetric information, the principal must balance the efficiency loss and the security for keeping the agents. We prove both the existence conditions for optimality and the uniqueness conditions for computational tractability. The coupled principal-agent problems are converted to solving a Hamilton–Jacobi–Bellman equation with equilibrium constraints. Extending the incentive contract to a multiagent setting with history-dependent terminal conditions opens the door to new applications in corporate finance, institutional design, and operations research.

Truck Platooning Aided Secure Publish/Subscribe System Based on Smart Contract in Autonomous Vehicular Networks

The publish/subscribe system over the autonomous vehicular networks (AVNs) enables the content providers to obtain more profits from a flexible notification system. However, few of current works focus on flexible brokers suitable for AVNs. In this paper, we propose a truck platoon aided secure publish/subscribe system based on smart contract in AVNs. Firstly, the truck platoons are utilized to be the brokers of the publish/subscribe system to realize a more efficient and secure publish/subscribe system. Secondly, a vehicular blockchain is established for the publish/subscribe system to record the transactions between brokers and publishers/subscribers to guarantee the complete and safe implementation of the smart contracts. Next, a contract based on the principal-agent problem is designed between the publisher and broker to maximize their utilities and stimulate the broker to be more active in the contents subscribing service. Furthermore, a smart contract is also designed between the subscriber and broker by the cloud server to achieve higher utilities and match an appropriate broker for the subscriber by considering its type. Finally, we carry out extensive numerical results to evaluate the performances of the proposed contracts, while the results also demonstrate that the proposal outperforms the conventional schemes.

Does Village Deliberation Forum Effect on The Quality of Road Infrastructure Inter-Village?

Decentralization is expected to improve the provision of public infrastructure by bringing local government closer and more responsive to the community needs. However, based on the theory, decentralization can lead to principal agent problems due to the presence of asymmetric information. Local government potentially want to prioritize their needs more than the needs of the resident. One proposed scheme to mitigate this problem is through participatory government. This study attempts to estimate the impact of decentralization on the provision of the public infrastructure, especially community participation through village deliberation forum on the provision of inter-village road infrastructure in Indonesia. Using a logit estimation approach, this study analyzes the impact of implementing village deliberation forum on the quality of inter-village roads in Indonesia in 2018. The estimation results show that the implementation of village deliberation forum has a positive effect on the probability that the village have good road quality. Thus, this study supports previous researches on the positive impact of public participation on the quality of public infrastructure.

The Impact of Trustees' Age and Representation on Strategic Asset Allocations

A board of trustees has the fiduciary duty to invest a pension fund's assets in the best interest of its beneficiaries. Trustees' characteristics should not affect their investment decisions. We find two counterfactual artefacts for corporate pension funds. First, a higher average board age lowers the strategic allocation to equity by 7 percentage points after controlling for the pension fund's characteristics. This way the strategic asset allocation does not fully reflect the beneficiaries' characteristics. Second, pension funds with a greater representation of employers on the board allocate more to equities. This fosters a principal-agent problem between employer trustees and beneficiaries.

OPTIMALISASI SKEMA BAGI HASIL SEBAGAI SOLUSI PERMASALAHAN PRINCIPAL-AGEN DALAM PEMBIAYAAN MUDHARABAH PADA PT. BANK SYARIAH CABANG MAKASSAR

This study aims to find out how to optimize the revenue sharing scheme so that it can be a Principal-Agent problem solution in mudharabah financing. This research was conducted at PT. Bank BNI Syariah Makassar Branch. This research uses qualitative descriptive analysis techniques. The type of data used is primary and secondary data. Primary data is obtained from the results of field research with direct interviews with the BNI Syariah Productive Funding Assistant in Makassar Branch. Secondary data is obtained from company documents and other sources related to research. The results of this study indicate that there are two Principal-Agent problems that occur in financing with mudharabah contracts, namely adverse selection and moral hazard. Determination of optimal profit sharing schemes, namely those that meet the utility of Islamic banks and customers, the problem of adverse selection and moral hazard that occurs in mudharabah financing can be minimized. Although mudharabah financing has a high risk, by optimizing the profit sharing scheme on mudharabah financing, the existing risks can be reduced and there will be an increase in the amount of mudharabah financing to Islamic banks.

A PRINCIPAL–AGENT APPROACH TO CAPACITY REMUNERATION MECHANISMS

We propose to study electricity capacity remuneration mechanism design through a principal–agent approach. The principal represents the aggregation of electricity consumers (or a representative entity), subject to the physical risk of shortage, and the agent represents the electricity capacity owners, who invest in capacity and produce electricity to satisfy the demand of consumers, and are subject to financial risks. Following the methodology of [J. Cvitanić, D. Possamaï & N. Touzi (2018) Dynamic programming approach to principal–agent problems, Finance and Stochastics 22(1), 1–37], we propose an optimal contract, from the perspective of consumers, which complements the revenue capacity owners achieved from the spot energy market, and incentivizes both parties to perform an optimal level of investment while sharing the physical and financial risks. Numerical results provide insights on the necessity of a capacity remuneration mechanism and also show how this is especially true when the level of uncertainties on demand or production side increases.

Social Versus Private Benefits of Energy Efficiency Under Time-of-Use and Increasing Block Pricing

Many energy policies are implemented to subsidize the adoption of energy efficiency. However, when private benefits from energy efficiency exceed the social benefits, there is an incentive for the consumers to over-invest in energy efficiency; otherwise, there is an incentive to under-invest. This study adds to this discussion by providing an empirical estimation of the electricity savings and social benefits after energy efficiency retrofits for consumers on time-of-use (TOU) and increasing block pricing, respectively. We aim to examine how social versus private savings from a given energy efficiency measure may be different depending on different pricing plans. This study applies hourly electricity data for about 16,000 residential consumers during 2013–2017 in Arizona. We show that for the TOU consumers, the private savings from energy-efficient AC retrofits are greater than the social savings by 61%, while the increasing block rate consumers’ private savings exceed the social savings by 46%, when other market failures are not considered (e.g., principal-agent problem and imperfect information). Different rate plans impose different marginal electricity prices which influence the incentives to invest in energy efficiency as well as electricity consumption behaviors that can influence both the private and social savings from energy efficiency. The result indicates that there should be potentially different levels of policy interventions towards energy efficiency for consumers on different pricing. Additionally, we also find that energy efficiency makes the electricity demand more elastic to price changes.

Has Private Equity Performed for Investors? An Annotated Bibliography

A rich body of empirical research over the past 15 years addresses the basic question of whether investments in private equity generally benefit investors in terms of (1) whether net returns from private equity are generally higher than net returns on comparable public equities, (2) whether private equity investors generally earn a volatility premium or suffer a volatility penalty relative to public equity investors, (3) whether investors generally earn a premium or incur a penalty associated with the extraordinary illiquidity of private equity investments relative to comparable public equities, and (4) therefore, whether private equity investors benefit from the asset category on a risk-adjusted net-of-fees basis. This article reviews the extant research approximately by publication date to highlight changes in the questions addressed, the methodologies employed, and the investment environment that managers faced. The literature is remarkable in its failure to find consistent evidence that private equity investors benefit financially from their exposure to the extraordinary risks and principal-agent problems inherent in the private capital model. TOPICS:Private equity, fundamental equity analysis, performance measurement Key Findings • It is relatively easy to show that gross returns from private equity investments typically exceed those from investment in public equities, as proxied by widely cited indexes such as the S&P 500. However, showing that private equity outperforms relative to comparable public equity investments, especially net of investment costs, is not simple. • The risks associated with leverage (explicit or implicit), volatility, and illiquidity in private equity investing remain difficult to quantify but are more than large enough to call into question whether private equity performs on a risk-adjusted basis. • Ample evidence suggests that the persistent misalignment of interests between private equity investment managers and investors—in various forms, including manipulated asset valuations, distortionary use of credit facilities, pressure to spend committed capital, and opaque or misaligned compensation practices—significantly reduces the net-of-fees returns received by private equity investors, but evidence also indicates that investors may systematically be fooled in this respect.

Accountability and integrity in private food safety regulation: Evidence from the Australian food sector

AbstractWith the proliferation of private regulation of food safety, governments have shown interests in engaging private schemes as co‐regulators. This raises the issue of accountability in private schemes; that is holding the bodies auditing the standards accountable. The ability to do so affects the integrity of private regulatory schemes. Holding auditors accountable can be conceived of as a principal–agent problem. This article analyses the two most widely used global private food safety standard schemes in the Australian food sector. The analysis shows that the existence of well‐developed accountability mechanisms and multiple principals has resulted in a multi‐layered and comprehensive system of accountability. Hence, holding auditors accountable to their principals does not appear to be a concern for governments considering to engage in co‐regulatory arrangements with private schemes. However, concerns about integrity have been raised. The prescriptive nature of the standards and the multitude of standard schemes with their own accountability arrangements has brought about a situation in which the individual auditors have to devote disproportionately much time to respond to the accountability mechanisms.

ACCOUNTING AND REPORTING OF AGENCY COSTS UNDER THE SCOPE OF AGENCY THEORY

Vekalet teorisi, birbirleri ile işbirliği durumunda olan tarafların motivasyonlarını, birbirlerini kontrol etme gereksinimlerini, aralarındaki bilgi akışını ve bu akıştan kaynaklanan sorunların çözümünü ele alan bir teoridir. Ekonomi, yönetim - organizasyon, satış - pazarlama ve muhasebe - finans gibi geniş alanda kullanılan, araçsallığı yüksek bir teoridir. Literatür taramasında vekalet teorisi ve asıl-vekil sorunları ile ilgili uygulamada farklı çalışmaların yapıldığı görülmekle birlikte, bu teori kapsamında vekalet maliyetlerinin neler olduğu ve finansal tablolarda nasıl raporlandığını konu edinen bir çalışmaya rastlanmamıştır. Bu çalışmada vekalet maliyetlerinin neler olduğu ve bu maliyetlerin finansal tablolarda hangi kalemler içinde raporlandığı ile ilgili kavramsal bir araştırma yapılması amaçlanmıştır. Çalışmanın sonucunda vekalet maliyeti olarak sayılan kalemlerin zaten işletmenin genel giderleri içinde var olduğu (sütteki kaymak) ama vekalet maliyeti adını ve başlığını taşımadığı görülmüştür. Vekalet maliyetlerinin üst yönetime raporlaması için ayrı bir sisteme gerek olmadığı, tüm giderleri içinden süzülüp raporlanmasıyla çözülebilecek bir işlem olduğu sonucuna varılmıştır. Öte yandan sadece vekalet maliyetlerinin raporlanmasına ilişkin ayrı bir sistem kurmanın fayda/maliyet ölçütü açısından anlamlı olmayacağı görüşüne ulaşılmıştır.

The Wane of Command: Evidence on Drone Strikes and Control within Terrorist Organizations

This paper investigates how counterterrorism targeting terrorist leaders affects terrorist attacks. This effect is theoretically ambiguous and depends on whether terrorist groups are modeled as unitary actors or not. The paper exploits a natural experiment provided by strikes by Unmanned Aerial Vehicles (drones) “hitting” and “missing” terrorist leaders in Pakistan. Results suggest that terrorist groups increase the number of attacks they commit after a drone “hit” on their leader compared with after a “miss.” This increase is statistically significant for 3 out of 6 months after a hit, when it ranges between 47.7% and 70.3%. Additional analysis of heterogenous effects across groups and leaders, and the impact of drone hits on the type of attack, terrorist group infighting, and splintering, suggest that principal-agent problems—(new) terrorist leaders struggling to control and discipline their operatives—account for these results better than alternative theoretical explanations.

Mean–field moral hazard for optimal energy demand response management

AbstractWe study the problem of demand response contracts in electricity markets by quantifying the impact of considering a continuum of consumers with mean–field interaction, whose consumption is impacted by a common noise. We formulate the problem as a Principal–Agent problem with moral hazard in which the Principal—she—is an electricity producer who observes continuously the consumption of a continuum of risk‐averse consumers, and designs contracts in order to reduce her production costs. More precisely, the producer incentivizes each consumer to reduce the average and the volatility of his consumption in different usages, without observing the efforts he makes. We prove that the producer can benefit from considering the continuum of consumers by indexing contracts on the consumption of one Agent and aggregate consumption statistics from the distribution of the entire population of consumers. In the case of linear energy valuation, we provide closed‐form expression for this new type of optimal contracts that maximizes the utility of the producer. In most cases, we show that this new type of contracts allows the Principal to choose the risks she wants to bear, and to reduce the problem at hand to an uncorrelated one.

The principal-agent problem in contracting public transport provision to private operators: A case study of the UK Quality Contract Scheme

This study explores the principal-agent problem as part of a broader discussion of the challenges of privatising and outsourcing of public utilities. The research asks: how can a public transport authority (the principal) motivate bus operators (agents) to achieve the authority's goals (more and better public transport) when their respective interests may not align? The case study is based on the UK “Quality Contract Scheme”, an option that has never been used before, thus providing an opportunity to understand the challenges in such cooperative schemes, and explore how public authorities struggle to achieve their goals via private service providers. Our findings reveal that the actors could not align their incentives due to transaction costs and information asymmetry, which ultimately damaged the quality of the financial projections and thwarted approval of the scheme.

The Influence of Economic Barriers and Drivers on Energy Efficiency Investments in Maritime Shipping, from the Perspective of the Principal-Agent Problem

Maritime transport stands out as a strategic sector; the increasing trend in maritime traffic makes it essential to reduce energy consumption and emissions through investment in energy efficiency. However, investments can be hindered by barriers, and drivers are necessary to reduce or overcome them and promote investment. Consequently, the purpose of this study is to analyze what factors influence investment decisions—and how they do so—when there are principal-agent problems in the shipowner–charterer relationship. The methodology is based on the following process: model and hypotheses formulation, variable definition, the creation of a study sample and statistical treatment through a descriptive analysis of variables and a binomial logistic regression model, all based on a state-of-the-art application. The results corroborate the hypotheses and indicate that principal-agent problems and split incentives, especially in time charter contracts, and a lack of verified information make the shipowners less likely to invest. Moreover, energy efficiency measures are less likely to be implemented in older vessels, possibly due to the difficulty associated with recovering the investment; they are more likely in larger and newer vessels, and regulation encourage their adoption. Furthermore, investment is more likely in vessels with verified information and high levels of both activity and harmful emissions. Improved knowledge in this field could help businesses and governments to act in a more sustainable manner, without detriment to an innovative and competitive sector.

Should I stay or should I go? British voter you got to let me know! Prime Ministers, intra-party conflict, and membership referendums in the British Westminster model

We explain the referendums on British membership of the European Communities and European Union from a principal–agent perspective between the Prime Minister and the rank-and-file. We show that announcing a referendum on the Prime Minister’s membership proposal helps the incumbent party to win the general election when the rank-and-file is divided on the terms of membership. When the Prime Minister overcomes the rank-and-file’s mistrust of her effectiveness in negotiating new membership terms with other member states, the voters are more likely to follow her proposal. However, when intra-party controversies reveal principal–agent problems, the initially uninformed voters can learn about the dysfunctionality of the terms and are more likely to reject the Prime Minister’s proposal.