Principal-Agent Theory and Representative Government.

• Author: Higgs, Robert
• Position: Etceteras ... - Essay

In recent decades, economists have devoted great efforts to the analysis of the principal-agent problem (see, for example, Milgrom and Roberts 1992). This area of study has to do with the incentives and disincentives of an agent acting on behalf of a principal that he is presumed or contracted to represent. No brief summary can do justice to the great variety of issues and problems considered in this literature, except possibly this: a perfect agent is, for various reasons, pretty much impossible, and in many cases a great gap exists between what the agent does and what the principal wanted him to do but could neither compel nor induce him to do with any feasible agency contract.

Although this literature resides mainly in the subfield of economics known as industrial organization, it has substantial implications for the study of politics. For example, the framers of the U.S. Constitution created an institutional framework for the operation not of a democracy but of a representative republic. There's that troublesome word--representative. Now consider this: if a principal in a market setting-- say, the owner of a business--cannot create a workable contractual relationship (i.e., one without shirking or other forms of opportunism) with his agent--say, the hired manager of his business--what are the chances that the so-called representatives of citizens in the United States of America (the president, the state governor, the Congress member for one's district, and the state legislature member for one's district) can in any meaningful sense represent more than a handful of citizens? People have complex and widely differing political preferences. How can a congressperson represent hundreds of thousands of persons when a firm's board of directors cannot reliably control the firm's president? The political task assigned is impossible. The "representative" part of the representative republic cannot be taken seriously by anyone who thinks about the matter more than a minute or two.

Moreover, unlike the market setting, where principals can establish measurable objectives for an agent to accomplish and create legally enforceable, quantitative incentives for the achievement of the goals established--for example, defined profit sharing or graduated compensation, perhaps in the form of stock options or other links to the agent's performance--the political setting permits no such linkages. As a rule, the candidates for election to public office make vague...