Principal-agent Problem Research Articles

Overcoming the Principal-Agent Problem: Tax Law and Policy in Communist-ruled China, 1931-1952

Overcoming the Principal-Agent Problem: Tax Law and Policy in Communist-ruled China, 1931-1952

Optimal contracts and asset prices in a continuous-time delegated portfolio management problem

<p style='text-indent:20px;'>We study optimal contracts and asset prices in a financial market in which an investor delegates a portfolio manager to manage her wealth. The agency frictions are caused by the manager's "shirking" action and hidden effort. The shirking action converts part of the return of the managed portfolio into the manager's income without reducing his utility. The manager's effort improves the return of the portfolio but reduces the manager's utility. We illustrate this dynamic principal-agent problem under hidden effort and observable effort, respectively. When the effort is hidden, to alleviate the impact of moral hazard, the investor pays more for the manager's performance and always keeps the optimal contract related to the returns of the manager's portfolio and market portfolio, and their quadratic (co)variations. When the manager's effort is observable, the optimal contract is related to the return of the market portfolio if the agency friction caused by the shirking action is serious, but is only related to the return of the manager's portfolio if shirking is not serious. Analysing the expected utility of the manager, we find that he has a disposition to hide information about effort to pursue a higher expected utility.</p>

Digitalization in The Organizing of Apartment Building Major Renovation in Russia

The article substantiates the necessity and possibility of using information and communication technologies to reduce the severity and intensity of the principal-agent problem that arises in the modern system of organizing the major renovations of apartment buildings in Russia. Based on the “Arshtein ladder of civic participation” the article proposes a hierarchical model for a meaningful assessment of the existing resources of information and communication support for the major renovation system in Russia. This model includes seven levels of participation of homeowners in solving the problem of a building renovation. The analysis of the content and services of information support resources for the major renovation system of apartment buildings in Russia showed that they do not contribute to the practice of active real participation of homeowners in resolving issues of renovations, they are at the level of “symbolic” participation, providing information about the regulatory the legal framework for renovations, the structure of regulatory authorities in this area, the current activities of regional operators. The information support of the major renovation system of apartment buildings in Russia is an information flow from authorities to citizens, with a weak or absent feedback flow with the ability to control incoming initiatives and complaints, which does not allow us to state progress in mitigating the consequences of the principal-agent problem in this area.

Equity Incentive Model, Source of Subject Matter and Enterprise Performance: Modification Effect Based on Equity Incentive Intensity

For modern enterprises, equity incentive is an important means to solve the principal-agent problem, the choice of incentive mode and the source of the incentive is an inevitable issue in the implementation of an equity incentive scheme. Based on the sample data of A-share listed companies from 2010 to 2020, this paper constructs a panel two-way fixed effect model, combining regression analysis and three interactions with differential equations (PDE), which empirically explores the relationship between two incentive models of stock option and restricted stock, the source of subject matter and enterprise performance. The study shows that the restricted stock incentive model significantly improved the performance of enterprises, and the intensity of incentives played a significant inverted U-shaped moderating role between the enterprise’s performance and the different incentive models. After adding the subject matter incentive source, it is further found that repurchase, as the source of subject matter, has a positive moderating effect on restricted stock and a negative moderating effect on stock option. The intensity of equity incentives moderates the relationship between stock option incentive models and enterprise performance when enterprises use repurchases as the source. The results of the above-given research provide some reference for enterprises to give appropriate incentive intensities, objective selection of the subject matter source under different equity incentive models based on their characteristics, and facilitation of more efficient use of equity incentive tools.

Confucian culture and corporate bond pricing

We investigate the effect of Confucian culture on corporate bond pricing. Using the birthplace data of 56,759 Jinshi in the Ming and Qing dynasties to construct a proxy of Confucian culture, we find a significantly negative relation between Confucian culture and bond pricing: the stronger the Confucian atmosphere of the corporate headquarters’ location, the higher the bond rating and the lower the credit spread. This conclusion still holds after using the distance to the nearest ancient printing office as an instrumental variable and a series of robustness tests. The mechanism test shows that Confucian culture can improve the pricing efficiency of corporate bonds by fostering investors’ trust, alleviating principal–agent problems and restraining bad corporate behaviors. Moreover, the impact of Confucian culture on corporate bond pricing is greater for firms located in regions with weak legal and other formal institutional constraints and for unlisted companies. Our study complements the literature on culture and bond pricing, and provides policy insights from traditional Chinese wisdom for improving the efficiency of financial markets.

World Bank aid and local multidimensional poverty in Sub-Saharan Africa

To what extent can World Bank (WB) aid reduce poverty to achieve the sustainable development goals? Recent literature suggests that the WB prefers to target affluent areas, prompting speculation about its ineffectiveness in poverty reduction. We contribute to the literature by examining whether WB aid alleviates poverty at the project level under the traditional motivations of aid flows. Combining geo-coded project data (2000–2014) with the individual multidimensional poverty index in 31 sub-Saharan African countries, we employ difference-in-differences and instrumental variable estimation strategies to address endogeneity. We demonstrate that WB aid significantly alleviated multidimensional poverty where projects were implemented by increasing public resources rather than economic activities, but only for the poor in more developed areas. The principal-agent problem and aid conditionality could weaken overall effectiveness. Our results suggest that enhancing multilateral cooperation can avoid the WB's drawbacks in incentive structures and amplify its advantages in improving social welfare. • It is unclear whether World Bank aid reduces poverty, given its poor targeting. • We use DID and IV methods to study the impact of aid projects on local poverty. • World Bank aid reduced poverty by increasing public goods only in affluent areas. • The principal-agent problem and conditionality limited overall aid effectiveness. • This paper provides implications of enhancing multilateral co-operation for donors.

Campaign Principal-Agent Problems: Volunteers as Faithful and Representative Agents

Campaign Principal-Agent Problems: Volunteers as Faithful and Representative Agents

Randomization is optimal in the robust principal-agent problem

A principal contracts with an agent, who takes a hidden action. The principal does not know all of the actions the agent can take and evaluates her payoff from any contract according to its worst-case performance. Carroll (2015) showed that there exists a linear contract that is optimal within the class of deterministic contracts. This paper shows that, whenever there is an optimal linear contract with non-zero slope, the principal can strictly increase her payoff by randomizing over deterministic, linear contracts. Hence, if the principal believes that randomization can alleviate her ambiguity aversion, then restricting attention to the study of deterministic contracts is with loss of generality.

Agency theory: Forecasting agent remuneration at insurance companies

The principal–agent problem occurs when one entity (the “agent”), is able to make decisions and/or take actions on behalf of another person or entity (the “principal”). The agent earnings are regulated under a contract designed by the principal. Under the principal’s point of view, the main goal while designing said contract (and the payment rules incorporated on it) is to align the actions made by the agent to the principal’s own goals. So, in this paper we will define a method that will allow the principal to forecast the remuneration obtained by the agent under an established contract in the insurance sector.

Is there a Principal-Agency Problem with Real Estate Agents in Rental Markets?

Is there a Principal-Agency Problem with Real Estate Agents in Rental Markets?

Outsourcing elderly care to private companies in Russia: (non)compliance and creative compliance as responses to the principal-agent problem

ABSTRACT Why do regions (non)comply or creatively comply in response to federal-driven reforms in Russia? This article studies the interplay of interests and incentives prompted by a contract between a principal and agents on the one hand, and shaped by the regional socio-economic context on the other. The analysis proved that the incapacity of the public sector to satisfy the societal demand for services in urbanised areas encouraged compliance. The creative compliance results from a need to demonstrate commitment to the reform in regions with a lack of favourable conditions. Non-compliance is adopted in ethnic republics and in relatively poor regions.

Slack resources and firm performance: evidence from GCC countries

PurposeManagement research has emphasized the effects of slack resources on the decision-makers’ strategic choices. Behavioral theorists have argued for a positive effect of slack through encouraging search and innovation while agency theorists have emphasized that slack can accentuate the principal–agent problem, which negatively affects firm performance. This paper aims to extend this argument and empirically investigate the separate effects of three types of slack resources (i.e. available, recoverable and potential) on firm performance in an important emerging market, namely, the Gulf Cooperation Council (GCC).Design/methodology/approachThe two-step system generalized method of moments (Sys-GMM) is applied to a panel of 360 firms in the six GCC countries, namely, Kuwait, Saudi Arabia, UAE, Qatar, Oman and Bahrain, over the period between 1999 and 2019.FindingsThe authors find that available and potential slack are both negatively associated with firm performance. The relationship between recoverable slack and performance is quadratic (inverse U-shaped) where recoverable slack improves performance only up to a specific point, but after that level, recoverable slack starts to negatively affect the performance of the firm.Originality/valueThis paper contributes to the literature in three important ways. First, this paper advances a first attempt to differentiate between three separate types of slack on firm performance in the context of the GCC market. Second, this paper empirically investigates the presence of the principal–agent problem in the GCC market and relates it to the ongoing debate on the agency effects of slack resources. Finally, this paper underlines the effects of institutional frameworks and environments on the relationship between slack resources and firm performance.

Principal–Agent Problems with EU Funds: A Case Study of Patronage in Hungary

EU funds have been linked to high levels of corruption, even given substantial administrative and regulatory requirements and extensive domestic monitoring. We posit that this divergence between actual outcomes and preferred policies can be attributed to the co-optation of the auditing and monitoring processes by member-state governments. We outline the importance of the auditing process and flow of information to the European Commission using a delegation model and then test what occurred when this process was co-opted in Hungary. We find that the co-optation of the auditing process results in a rise in patronage and corruption.

The ugly truth behind transitional justice in the post-revolution phase: A constitutional law and economics analysis

AbstractThis article explores the transitional justice (TJ) dilemmas after revolutions have overthrown autocratic regimes through developing a model that uses a law and economics methodology. The article seeks to answer two questions: Why do post-revolution regimes resort to or ignore TJ policies towards former autocratic regimes? And why is it difficult to adopt and apply welfare-enhancing TJ mechanisms in practice, including popular suggestions within the TJ literature to portray the civil society organizations as the key solution to TJ dilemmas? To answer these questions, the article provides a theoretical positive analysis of the scenarios and dilemmas of TJ. It argues that TJ should function both as an internalization mechanism of negative externalities of the violations of the past-regime, and a form of constitutional arrangements as anex anteincentives structure to prevent the repetition of these violations. However, due to asymmetric information problems, behavioural biases and the constitutional nature of TJ, the ‘TJ momentum’ precludes most of the traditional solutions for this principal–agent problem.

Factors associated with harvest and postharvest loss among soybean farmers in Western Paraná State, Brazil

The United Nations included reducing harvest and postharvest losses as a Sustainable Millennium Development Goal in 2015, leading to increased research and policymaker interest in reducing losses to insure food security. This article analyzes the factors associated with self-reported harvest loss among soybean farmers in Paraná, Brazil, using a survey of 243 farmers. The principal–agent problem is the most important contributor to harvest and postharvest losses on the farm. Loss is lowered when the combines are operated at slower speeds and are adjusted properly, but combine operators have incentives to complete harvesting jobs and deliver soybean to storage facilities quickly. Farmers report training of the combine operators as one of the most important causes of postharvest loss. Empirical results show that farmers report a 1.5 percentage points higher harvest loss when they ask a third party to harvest. Similarly, the farmers’ education level is negatively associated with harvest loss; farmers with college completion have 1.6 percentage points less loss compared to farmers with less than fourth grade. However, larger planted areas are associated with higher harvest loss. The paper suggests that who harvests the crop is critical in reducing harvest loss. Policies and contract designs that align incentives between farmers and combine operators might reduce harvest and postharvest loss.

When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements

A misincentive is characterized as an incentive producing the opposite effect of motivating or preventing some specific action. In some circumstances, contract penalties such as sanctions and fines on late delivery or low-quality software encourage the irregularities instead of preventing them from occurring. The present study models misincentive behaviors in Information Technology Outsourcing (ITO) transactions as a Principal-Agent problem. Considering the non-linear relationship in software vendors’ cost structure and the client’s sensitivity to the product/service quality and delivery time, we offer theoretical modeling elucidating the best responses on agreements under incomplete and asymmetric information. Some empirical evidence of contractual misincentives is reported in outsourcing arrangements between private institutions and public administrations in Portugal. The contracts were divided into three categories: pure contracts with no incentive clauses, contracts with no explicit monetary penalties, and contracts under explicit sanctions. The results suggest that the knowledge of the penalty reduces the Agent’s uncertainty about the Principal’s cost structure and might lead them to intentionally delay the delivery of the technology.

AN AGENCY THEORY APPROACH TO DISINTERMEDIATION IN THE MICE DISTRIBUTION CHANNEL FROM THE PERSPECTIVE OF THE HOTEL INDUSTRY

MICE Tourism is a segment of the tourism industry that deals with the organisation of Meetings, Incentives, Conventions and Exhibitions, which are experiencing a major process of disintermediation. This article applies the principal-agent problem in the theory of agency to analyse MICE disintermediation. It uses a dominant/sequential qual-QUAN mixed methods approach. Firstly, through interviews with MICE professionals to validate the research variables, test sample and questionnaire. Then, quantitative research using a survey sent to 365 MICE stakeholders in Europe. The opinions of hoteliers were compared with those of other MICE stakeholders to analyse disintermediation and determine the role of hoteliers in this new scenario. Our findings confirm a trend of partial disintermediation in which hotel bookings are the most disintermediated service and hoteliers are the stakeholders that pose a more proactive and aggressive attitude towards disintermediation. This paper is of interest for MICE stakeholders to better understand their position in the value chain and interpret the process of disintermediation. Its originality is based on the fact that it gathers the opinions of all MICE agents with a special focus on the perspective of its most dominant actor: the hotel.

Principal-agent problem with multiple principals

We consider a moral hazard problem with multiple principals in a continuous-time model. The agent can only work exclusively for one principal at a given time, so faces an optimal switching problem. Using a randomized formulation and techniques from the theory of backward SDEs, we manage to represent the agent's value function and his optimal effort by an Itô process. This representation further helps to solve the principals' problem in case we have infinite number of principals in the sense of mean field game. Finally, to justify the mean field formulation, we develop the so-called backward propagation of chaos, which may carry independent interest itself.

Are they one of us? The effect of political professionalization on the political elite's social closure and the principal-agent problems, 1978–2019

ABSTRACT This article examines the effect of political professionalization on descriptive representation and the principal-agent problems in the European micro-states and six large-scale democracies since 1980. By doing so, the article revisits an ongoing debate about the consequences of having a political elite professionalized. Using an original data set consisting of the individual and legislative professionalization characteristics of twelve European sovereign states and the aggregate socio-demographic characteristics of parliamentarians at national parliaments, this article shows that while legislative professionalization is a determinant for descriptive representation, politicians’ professionalization is a negative determinant for political responsiveness and accountability. Moreover, this article underlines population size as a determinant for the descriptive representation of certain socio-demographic characteristics and it describes the null effect of population size on the negative causal relation of politicians’ professionalization on political responsiveness and accountability.

Risky business: policy uncertainty and investment

Previous work has shown that nonlinear taxation can affect the willingness to undertake risky investments. We show that similar results can arise if agents are uncertain regarding future tax rates. Uncertain taxes distort investment decisions when tax rates are correlated with marginal productivity. We demonstrate this result in a simple theoretical framework, which can also explain some well-known results on the effects of tax progressivity and tax asymmetry on investment. Time-series estimates for the post-WW2 era suggest a negative correlation between effective tax rates and total factor productivity in the USA, yielding an effect on firm investment equivalent to an investment subsidy of around 1 percent. Our results have wide-ranging implications for a variety of tax-related work, including effective tax rates, optimal audit policy, and principal-agent problems between investors and managers.