Sakshi Education
By Srirangam Sriram, Sriram's IAS, New Delhi.
The principal–agent problem, in political science and economics occurs when one person or entity, agent, is able to make decisions and take actions on behalf of, or that impact, another person or entity: the principal.
This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals.
For example, in a democracy, voters elect a government. Voters are principal and the government is their agent. But it may so happen that the government in power does not act in their best interests. Therefore, there are periodical elections at multiple levels where the principal can course-correct as a check on the agent.
In a public private partnership, the government looks to the private party that is contracted to execute and operate a project. It may go against the rules and not conform to standards.
Other example of this relationship is corporate management (agent) and shareholders (principal).
The principal-agent problem typically arises where the two parties have different interests.
Various mechanisms may be used to align the interests of the agent with those of the principal. Contracts, criminalisation of deviance, periodical checks, surprise checks, e-governance and transparency are some checks.
This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals.
For example, in a democracy, voters elect a government. Voters are principal and the government is their agent. But it may so happen that the government in power does not act in their best interests. Therefore, there are periodical elections at multiple levels where the principal can course-correct as a check on the agent.
In a public private partnership, the government looks to the private party that is contracted to execute and operate a project. It may go against the rules and not conform to standards.
Other example of this relationship is corporate management (agent) and shareholders (principal).
The principal-agent problem typically arises where the two parties have different interests.
Various mechanisms may be used to align the interests of the agent with those of the principal. Contracts, criminalisation of deviance, periodical checks, surprise checks, e-governance and transparency are some checks.Published date : 06 Jan 2021 02:52PM
