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Agency Theory

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Agency Theory

This topic examines the Principal-Agent Problem, a problem that often arises when one party (the principal) delegates work to another (the agent). It is created by the reality that the goals and risk preferences of the agent can differ from those of the principal, and it can be difficult or expensive for the principal to verify what the agent is doing (York University). This topic examines how the Principal-Agent Problem arises in the principal-agent relationship between minister and public servant. Solutions to this problem are then examined; in particular, organizing information and risk-bearing costs efficiently (Eisenhardt 1989:57). 

Topic Learning Outcome: Students will be able to analyze and interpret developments that involve imperfect cooperation between a principal and an agent. They will understand the circumstances under which principal-agent problems are likely to arise and how they can be managed.

Core Concepts associated with this Topic: Agency Theory; Thompson's Three Models of Public Sector Accountability.

Recommended Readings

University of Chicago: Public Policy 31920 Decisions and Organizations

Gibbons, R. "Lecture Note 1: Agency Theory."

Holmstrom and Milgrom (1991). "Multitask Principal Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design", Journal of Law, Economics, and Organization 7: 24-52.

Eisenhardt, M, K. (1989). “Agency theory: An assessment and review.” Academy of Management, The Academy of Management Review, 14(1), pp. 57. 

 Sample Assessment Questions:

1.) What is a principal-agent problem? Why is this an important concept for public sector managers to understand?

2.) Explain how the principal-agent problem can arise in the specific instance of collaboration between unelected public servants and the elected official who they serve.

Page created by Sean Goertzen and Ben Eisen on 19 May 2015.


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© University of Toronto 2008
School of Public Policy and Governance