J.-E. LANE
pal-agent model. It asks pertinently:
1) Which agents are to be employed in policy implementa-
tion?
2) Can politicians as agents of demos be trusted, under what
rules of the game?
The principal-agent model identifies two major difficulties
when a principal contracts with a set of agents under asymmet-
ric information, namely moral hazard (hidden action) and ad-
verse selection (hidden knowledge). These two difficulties sur-
face whether the contract is explicit and enforceable in court, as
with policy implementation, or the contract is opaque and only
enforceable to a limited extent, as with politics.
The principal-agent model has been applied in various pri-
vate sector settings, such as the remuneration of CEOs, the
choice of contracts in agriculture and the client-lawyer interac-
tion (Rasmusen, 2006). When it is applied to politics, then one
must model a double principal-agent interaction, starting
backwards with first the government choice of agents who will
handle the provision of services and moving then to the choice
of the electorate of political agents with different policy pref-
erences.
The most simple principal-agent model analyses the interac-
tion between a risk prone principal and a set of risk avert agents,
where the former hires the latter on the basis of a contract in-
volving work effort, salary plus perks involving a basic quid
pro quo, whereby the agents are paid from the value of the
output they deliver. The agents may deliver low or high effort,
which has implications for the probabilities of low or high out-
put. As the principal aims for high output, he/she wants to write
a contract that elicits high effort. But all contracts are subject to
two basic principles that must be satisfied: the reservation price
of the agents on the one hand and incentive compatibility on
the other hand. With perfect information one may calculate first
best solutions that satisfy these requirements. However, given
asymmetric information—hidden actions and hidden knowl-
edge, one has to face suboptimal solutions. They are actually
well-known in the literature on bureaucracy and comparative
politics, although the language of the principal-agent model has
not been used.
The Niskanen model of bureaucracy with the public choice
school is a principal-agent model where the agents employ their
information advantage to supply a non-optimal level of public
services. In non-democratic politics, the rulers monopolize the
benefits in politics, sometimes reducing the population to a
form of political slavery (Burma), but always restrict the choice
of the electorate, in order to make looting easier. The opposite
solution, exploitation, is also feasible, for instance in agricul-
ture with powerful landlords (zamindars) employing indentured
labour or controlling sharecropping contracting (McLane,
1993).
Between these two extreme solutions, exploitation by the
principal versus looting by the agents, one finds all kinds of
varying solutions concerning both the value produced and the
division of the mutual gains from interaction. The output can be
either private or public services and the value of the output may
be calculated with market prices or the willingness of tax pay-
ers to pay. One application of the principal-agent model was
less focussed upon rent seeking and targeted more prestige. The
public choice model of public regulation claimed that it had a
fundamental credibility problem, as regulators would like to
deviate from the original policy intentions behind regulatory
schemes.
Below, we focus upon the struggle between the principal and
the agents about the division of the monetary gains from coop-
eration. When agents are self-centred and do not refrain from
opportunism with guile, then what strategies can they employ
in order to get an extra payment using asymmetric information?
Agency Costs
The population as principal has to carry two kinds of agency
costs. First, there is the remuneration of political elites, both
pecuniaty and non-pecuniary. The direct costs may go very
high in non-competitive regimes, as looting is much more
probable in them. Second, there are the indirect costs from dire
agent performance or mistakes, which could go as high as the
complete loss of huge national assets or political territory. Po-
litical leaders may promise paradise on Earth, but accomplish
only destruction. “Mission accomplished”, declared President
Bush, only to have to face the strong insurrection in Iraq that
costs so much in terms of peoples’ life, American causalties
and misspent trillions.
First, politicians wish to have discretion on policies in tela-
tion to their voters, which is what asymmetric information pro-
vides. Thus, they claim that they have a general mandate from
the population to search for the policies that are in the national
interest. Politicians have their own agenda, open or hidden. The
election contract tends to be little specific, often general or
ambiguous. It is a fundamentally incomplete agreement, al-
lowing the politicians as agents much space to maneouvre in
relation to unforseen circumstances, or the contingencies. The
politicians may set up a multi-party system, which would make
coalitions possible beyond the horizon of their voters.
Given such opaque election contracts, the politicians would
wish to amass consierable amounts of resources to allow them
to operate freely, either as parties (partitocrazia) or as in-
depenents (political entrepreneurs). And they would wish to
maximise the resources for the conduct of their business, either
by state contributions to parties (Europe) or by means of soci-
ety contributions through e.g. the PAC system in the US. These
resources—spolia—will be used to remunerate or give favours
to the people who helped them win elections, using massive
propagande to convince the principal about their suitability as
political agents. Thus, party government emerges with massive
rent seeking where the political elite has a formidable knowl-
edge advantage over the population.
Second, under asymmetric information the implementation
agents will embark upon various opportunistic startegies that
increase their remuneration, pecuniary or non-cuniary ones.
Thus, bureaucracies and public enterprices exploit the budget
maximising strategy-shirking. The move of government to New
Public Management, i.e. tendering/bidding under a regime of
short-term contracts, will stop moral hazard in the public sector,
but it invites adverse selection as agents bid who are not trust-
worthy or reliable . Managing tournaments and auctions will be
as difficult as to monitor huge bureaux for government as the
principal of the public sector.
Agency costs, like e.g. the spoils of competitive politics are
motivated by the classical Burke theory of politicians as the
guardians of the general interests of the principal. But who
knows the true interest of the population—asymmetric infor-
mation?!
Sometimes the rent-seeking ambitions of political agents
lead them to eng age in illegal activiti es :
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