Principal-agent Problem Research Articles

Managing Asymmetric Information Effects in Decision-Making Productivity-Based Model

Making the correct decision requires the possession of sufficient information regarding each alternative possible solution. Nevertheless, the investigation of all possible solutions to select the best alternative is complex and expensive. This article addresses the Principal-Agent problem, where the key feature is asymmetric information. Asymmetric information approaches the decision investigations in a business context, where one participant possesses more or better information than the second party. The authors consider the case where the principal is more knowledgeable than the agent. The article proposes a formal model for assessing agent competence based on his productivity and the principal assessment. The model output helps the agent to make the correct decision.

Paying Extra for a Label? Evidence of Principal-Agent Problem in the Housing Market

Intermediaries play an important role in markets with asymmetric information by reducing the search friction and uncertainty for buyers and sellers. However, when a conflict of interest arises, agents may not fully act on behalf of their clients. Using a unique dataset of both housing resale transactions and agent showing records from a major brokerage firm, we document the brokerage agents’ steering behaviors induced by the differential treatment of certain housing units under the taxation scheme in China. Our results show brokerage agents do not always help consumers reduce information asymmetry but strategically promote the units that receive the favorable taxation treatment, because these units offer higher expected commissions. The steering efforts lead to better sales performances of the labeled houses and are highly correlated with the agents’ ability and steering incentives. The buyers thus bear the welfare consequences from potential mismatch and the additional cost in acquiring the labeled units.

Existence of solutions to principal–agent problems with adverse selection under minimal assumptions

We prove an existence result for the principal–agent problem with adverse selection under general assumptions on preferences and allocation spaces. Instead of assuming that the allocation space is finite-dimensional or compact, we consider a more general coercivity condition which takes into account the principal’s cost and the agents’ preferences. Our existence proof is simple and flexible enough to adapt to partial participation models as well as to the case of type-dependent budget constraints.

Acquiring air quality monitoring data through the hierarchy or the market: A case study of Shandong province, China

This article investigates the principal-agent problem in acquiring air quality monitoring data through the government hierarchy in China and uses Shandong as a case study for illustrating how it is addressed by resorting to a market approach. Adopting transaction cost economics perspective, we analyzed contractual hazards in both relying on the hierarchy and the market. We found the Shandong provincial environmental protection bureau has specified eligibility criteria and crafted contract terms that can reduce the risk of being held up resulted from asset specificity, increase efficiency, improve observability of both input and output quality, and induce accountability by enforceable rewards and sanctions. The lessons learned contribute to the literature on multi-level environmental governance and are useful for institution building for achieving sustainable development in China and beyond.

Variable executive remuneration and company performance: Insights from the Johannesburg Stock Exchange, South Africa

Orientation: Agency theory predicts that agency relationships are subject to the principal-agent problem. Other theories also suggest that executives may tend to maximise sales revenues, or expand their spans of influence through growth, at the expense of the net value of the firm or its profitability. Research purpose: The purpose of this study is to test which forms of company performance are associated with higher executive variable pay ratios or determine the proportion of variable director remuneration to total remuneration. Motivation for the study: The extent to which variable remuneration is associated with different types of firm performance is unclear. Research design, approach and method: This study applies a simple panel regression model to test the extent to which the variable ratio of total director remuneration contributes differently to increases in firm revenue, total assets, return on assets, or measures of Tobin’s Q. These relationships are tested for listed companies on South Africa’s Johannesburg Stock Exchange, South Africa, for the years 2011–2014. Main findings: Variable remuneration is found to be negatively and strongly related to total revenue and negatively and weakly related to total assets (the gross measures of performance). In contrast, variable remuneration is weakly and positively related to Tobin’s Q, a measure which better reflects the interests of shareholders than gross measures. Practical/managerial implications: Firms in this context should seek to strengthen the linkages between variable remuneration and forms of performance that reflect the interests of stakeholders. Contribution/value-add: In the wake of global and local governance failures, this study suggests that the use of the variable component of executive remuneration might be helpful in aligning stakeholder interests. Further research might seek to better understand the causal mechanisms that underlie these findings.

Blunt force regulation and bureaucratic control: Understanding China's war on pollution

AbstractIn the past decade, China has increasingly resorted to top‐down, “blunt force” solutions to environmental problems; officials forcibly shutter or destroy factories to reduce pollution, at immense cost to local growth and employment. Why would a high capacity state like China resort to such a costly method of pollution control? I argue that blunt force enforcement is targeted at overcoming principal–agent problems in the bureaucracy. When institutions are too weak to hold bureaucrats accountable, political leaders increase oversight by drastically reducing the number of steps and resources required to produce a regulatory outcome—resulting in blunt force measures. I illustrate this logic through case studies from China's multiyear war on pollution. Using original data on blunt force measures, I then show how localities with lower bureaucratic compliance face greater blunt force pollution enforcement. These findings reveal that when bureaucratic accountability is weak, states pay a very high cost for cleaner air.

Curbing Illegal Grazing Through Mediating Interests of Local Communities in East Nusa Tenggara Province, Indonesia

Communities living surrounding forest have used state forest for grazing area in East Nusa Tenggara Timur Province, Indonesia for a long time.  However, Indonesia government have not given them a permit for managing state forest. Government will involve communities in state forest management   to generate people income but government ,as a principal, was worried that the communities, as agent,  will act in the way contrary to the interest of government. We used a principal agent theory to analyze principal agent problems which will occur if communities manage state forest for silvopasture purpose. The research showed that there are some principal agent problems in silvopasture contract if government give communities a permit for silvopasture purpose, i.e. communities, as agent, are not willing to plant trees and keep forest. Government must control communities to prevent some principal-agent problems in silvopasture contract.

Doomed Interventions: The Failure of Global Responses to AIDS in Africa, Kim Dionne

Reviewed by: Doomed Interventions: The Failure of Global Responses to AIDS in Africa by Kim Yi. Dionne Lauren M. MacLean BOOK REVIEW of Dionne, Kim Yi. 2017. Doomed Interventions: The Failure of Global Responses to AIDS in Africa. New York: Cambridge University Press. 212 pp. $89.98 (cloth), $20.52 (paper). In Doomed Interventions: The Failure of Global Responses to AIDS in Africa (2017), Kim Yi Dionne makes the case that the global response to HIV/AIDS in Africa has been a failure. This claim is contentious and controversial, especially given the billions of dollars spent by major multilateral and bilateral donors over the past several decades and trends that suggest that prevalence rates have declined over time. Dionne uses a couple of examples of global interventions that have failed in implementation in Botswana and Mozambique to motivate the book’s core puzzle. Where other authors, such as Lieberman (2009), have analyzed cross-national variation in government response to the crisis, Dionne’s contribution is her effort to unpack the process of implementation on the ground. This is not an easy task, but Dionne does it effectively by focusing on the dynamics within one country case over time. After providing a brief summary of the disease dynamics in the global and African contexts, she concentrates on Malawi, where international funds constitute 99 percent of the response to the disease. Her analysis is based on impressive fieldwork in three districts in each of the three administrative regions of Malawi between 2006 and 2010. Her data collection was part of a large, NIH-funded study on citizen perceptions and behaviors, and it included a survey of village headmen. [End Page 144] Drawing on a principal–agent theoretical framework, Dionne argues that these AIDS response efforts have failed because of problems of adverse selection and preference misalignment. She backs up this argument, about the disconnections between international donors and Malawians, with a wealth of quantitative survey data from citizens and original interview data from village headmen and other key informants. She convincingly shows how Malawians do not identify HIV/AIDS as their top priority. Her findings also highlight how survey question wording profoundly influences the answers elicited and that HIV/AIDS services are not necessarily perceived as a public good for all, but as an excludable good. In the chapter on village headmen, Dionne then further probes how village leaders may be influenced by their constituents and mediate between citizen and global perspectives. The most compelling theme that runs throughout the book is her call for greater attention to African perspectives and citizen viewpoints on international development policies. This book will interest scholars in political science, public policy, public administration, development studies, public health, sociology, and anthropology. Its chapters provide an excellent and provocative introduction to the challenges and shortfalls of the AIDS response that would be suitable for undergraduate or graduate classes. The book is very much framed in terms of African politics, but it has important insights that would be relevant for scholars, practitioners, and policymakers working in other regions of the developing world. For example, the book highlights the importance of traditional leadership at the local level in brokering between donors and their constituents. The questions about principal–agent problems in the implementation of international development policy are much broader and would be valuable for scholars studying Asia, Latin America, and the Middle East. Dionne leaves room for further exploration of the theoretical and policy implications of her findings, which have the potential to be far reaching. Lauren M. MacLean Indiana University Copyright © 2019 The Trustees of Indiana University

Analisis pengaruh growth terhadap profit pada perusahaan manufaktur terbuka di Indonesia: Analisis model panel data dinamis

Growth will affect profitability of a firm. There is ongoing debate about how growth will affect profit both theoritically and empirical results. Classical hypothesis predict growth will affect profit positively. Growth can improve firm profitability because the effect from economies of scale and the learning curve effect that makes the production process and the cost of production become more efficient. Behavioral hypothesis predict growth will affect profit negatively because of principal agent problem, managerial constraints, penrose effect or diseconomies of scale. The objective of this study is to examine the effect of growth to profit based on the argument between Classical hypothesis and behavioral hypothesis. This study used dynamics panel data with generalized method of moments (GMM) as estimator. This study observed 82 publicly listed manufacturing firm in Indonesia consist of nine periods from 2009 to 2018 resulting in 656 observations. Empirical result shows that growth will affect profit negatively. Thus, prove the behavioral hypothesis that predict negative influence of growth to profit.

Economic bonding, corporate governance and earnings management: Evidence from UK publicly traded family firms

This study examines whether auditor–client economic bonding and corporate governance moderate the adverse effects of principal–principal agency problems on earnings quality in U.K.‐listed family firms. We find that although earnings management is lower in family firms, there is a higher tendency of earnings management for those firms with economic bonding. However, such an impact may be moderated by good governance mechanisms where the latter may alleviate the adverse effects of the lack of auditor independence on the association between earnings management and family firms.

Do government subsidies stimulate firms’ R&D efforts? Empirical evidence from China

ABSTRACT Government subsidies have been one of the popular policy instruments to stimulate firms’ R&D activities. We empirically investigate the impact of government subsidies on firms’ R&D decisions of listed manufacturing firms in China. In contrast to prior studies, we split firms’ R&D decision into two elements of ‘whether to invest decision’ and ‘how much to invest decision’. The influences and mechanism of government subsidies on R&D decision are theoretically analysed to develop hypotheses tested in this study. We find that government subsidies have a promotion effect on both elements of the firms’ R&D decision. Moreover, we also demonstrate the heterogeneous effects of government subsidies between state-owned and non-state firms. Due to the inherent principal-agent problem of state-owned firms and soft budget constraint, subsidies can only increase the probability to undertake R&D activities but cannot stimulate further investment in R&D efforts. However, our results indicate that government subsidies take effects in both elements of R&D decision for non-state firms.

Can Audits Deter Performance Exaggeration?

Exaggeration of performance metrics (revenue, product efficacy, ad viewership, etc.) by entrepreneurs to investors and clients is a common problem in high tech entrepreneurship. We model this as a principal-agent problem in a contract-theoretic setting, where the entrepreneur (agent) can undertake costly actions to strategically lie about a key performance metric (agent type) in order to extract higher payment from the investor (principal). We demonstrate that the optimal contract features widespread exaggeration by all entrepreneur types, and the investor exploits it as a screening mechanism to ordinally rank the entrepreneur by his true underlying type. We study the effect of an audit in which, if caught cheating, the agent pays a penalty. We show that rather than deterring fraud, audits actually amplify the degree of exaggeration.

Interest groups in the European Union and their hiring of political consultancies

Interest groups do not only attempt to influence European legislation by devising and executing their own strategies, or relying on their allies. Almost 50% have also experience in hiring political consultants. Using novel survey data from the policy formulation stage, this study shows that business interest groups are more likely to hire consultancies than non-business interest groups. It suggests that business associations’ higher likelihood of hiring consultancies is linked to membership promotion. For firms, it likely relates to their need for specialised lobbying tools and trust-building measures when seeking private goods from policy-makers. Furthermore, the results indicate that consultancy hiring by business interest groups becomes less likely the more they focus on lobbying. This moderation effect highlights that business interest groups show awareness of principal–agent problems and take mitigating action.

Bundling and splitting: workspace tenure in two vectors

ABSTRACT The Bundling and Splitting Matrix is a conceptual framework of real property tenure. It is used here to derive hypotheses as to the effects of two principal-agent problems: adverse selection and moral hazard on commercial office workspace energy performance under differing tenure types. The purpose of testing these hypotheses, in future research, is to inform disclosure policy. Disclosure here refers to the sharing of information between commercial office workspace lessors and lessees. In demonstrating this framework’s use, this paper’s contribution is methodological. Mitigating adverse selection is the objective of international ex-ante disclosure programs but past research has not isolated ex-ante disclosure’s effect in that mitigation from its other effects. The use of this framework also extends the method used by research measuring energy performance under different contract types. By putting tenure type, rather than a single contract as the object of inquiry, it sets out single or multiple possibly additive or counter-veiling principal-agent problems, adverse selection and moral hazard, each with its disclosure remedy. It is argued that doing so is increasingly significant with the growth in information age forms of workspace tenure such as coworking.

Discrete‐time dynamic principal–agent models: Contraction mapping theorem and computational treatment

We consider discrete‐time dynamic principal–agent problems with continuous choice sets and potentially multiple agents. We prove the existence of a unique solution for the principal's value function only assuming continuity of the functions and compactness of the choice sets. We do this by a contraction mapping theorem and so also obtain a convergence result for the value function iteration. To numerically compute a solution for the problem, we have to solve a collection of static principal–agent problems at each iteration. As a result, in the discrete‐time setting solving the static problem is the difficult step. If the agent's expected utility is a rational function of his action, then we can transform the bi‐level optimization problem into a standard nonlinear program. The final results of our solution method are numerical approximations of the policy and value functions for the dynamic principal–agent model. We illustrate our solution method by solving variations of two prominent social planning models from the economics literature.

Managing asymmetric information effects in decision making: task complexity-based model

This paper proposes a formal model to manage the impact of asymmetric information in decision-making by using principal-agent problems in which an agent (who has incomplete information) must decide to perform or not perform a task on behalf of the principal. After performing a complex (simple) task, the agent underrates (overrates) his competence. As a consequence of underestimation, a competent agent may decide to stop performing the task henceforth. The agent infers his competence from his productivity on a performed task. However, the productivity depends on both the agent's competence and the task complexity. To avoid this situation, the company appoints a mentor (fully informed superior agent) who can determine the task complexity and assess the agent's competence. Accordingly, the mentor matches the task complexity perfectly with the agent's competence. In cases where the mentor and the junior have different preferences, the mentor may not confess all information to the agent. Nevertheless, the mentor desires the agent to fulfill the task. This paper proposes a solution for all of these situations by using a mathematical model. The model assesses the agent's competence based on his productivity and the mentor's appraisal and assists the agent in making the right decision.

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 necessarily 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 money. 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.

Can Technology Solve the Principal-Agent Problem? Evidence from China’s War on Air Pollution

We examine the introduction of automatic air pollution monitoring, which is a central feature of China’s “war on pollution.” Exploiting 654 regression discontinuity designs based on city-level variation in the day that monitoring was automated, we find that reported PM 10 concentrations increased by 35% immediately post–automation and were sustained. City-level variation in underreporting is negatively correlated with income per capita and positively correlated with true pre-automation PM 10 concentrations. Further, automation’s introduction increased online searches for face masks and air filters, suggesting that the biased and imperfect pre-automation information imposed welfare costs by leading to suboptimal purchases of protective goods.

Outsourcing cyber power: Why proxy conflict in cyberspace may no longer pay

A sizable literature implies that states can achieve military and foreign policy objectives “on the cheap” by outsourcing covert operations to willing non-state proxy actors, be they mercenaries, patriotic zealots, pranksters, or simply enemies of enemies. By outsourcing, a host government can claim plausible deniability while all the while cashing in on strategic gains. Attribution is notoriously difficult in cyberspace, so outsourcing should especially prevalent. Puzzlingly, strategies of cyber outsourcing have not widely diffused, even in countries where hackers are both highly capable and ideologically sympathetic to host state objectives. This article leverages a formal analytical model to hypothesize about why it might no longer pay to outsource to cyber proxies. Default explanations, including principal-agent problems, are neither sufficient nor necessary to explain recently observed patterns. Instead, I argue, new attribution technologies, particularly the willingness of states to make allegations about informal state-proxy links on the basis of circumstantial and cumulative rather than legally admissible evidence, mean that outsourcing carries no real added benefit to offset its risks. Normative momentum regarding the international law on state responsibility should only reinforce this trend as international audiences come to more fully accept nontraditional forms of attributive evidence.

Stochastic Linear Quadratic Stackelberg Differential Game with Overlapping Information

This paper is concerned with the stochastic linear quadratic Stackelberg differential game with overlapping information, where the diffusion terms contain the control and state variables. Here the term “overlapping” means that there are common part between the follower’s and the leader’s information, while they have no inclusion relation. Optimal controls of the follower and the leader are obtained by the stochastic maximum principle, the direct calculation of the derivative of the cost functional and stochastic filtering. A new system of Riccati equations is introduced to give the state estimate feedback representation of the Stackelberg equilibrium strategy, while its solvability is a rather difficult open problem. A special case is then studied and is applied to the continuous-time principal-agent problem.