Government Built on the Principal-Agency Problem


Writing on the quagmire of President Obama’s foreign policy, Richard Fernandez introduces a term that describes very well the challenge I observed on Friday, in Lawrence, Massachusetts, and in Rhode Island:

To understand how defeat can be winning  recall the old principal-agent problem. “The dilemma exists because sometimes the agent is motivated to act in his own best interests rather than those of the principal.” Even though the people might gain more by “winning” if the political class can do better by “losing” then they lose.

The Wikipedia entry to which Fernandez links for a quick explanation places at the core of the dilemma the fact that the agent (say, a corporate board) has an advantage in information over the principal (e.g., shareholders).  The board can better see the conditions of the investment and may find itself in a position in which recommending one path would pay off for the shareholders, but cost the board.

In the case of government, the asymmetry of information certainly exists, but the greater problem is the asymmetry of power.  In theory, of course, government agents must convince voters that public actions are in their best interest, which is an information issue, but the government has the advantage that direct consent is not immediately necessary, so its persuasion can be done post facto.  ObamaCare would never have won a national referendum, but imposing it and then manipulating asymmetrical information has kept it lumbering along.

The Greenhouse Compact failed in Rhode Island because it came to a vote of the people, while RhodeMap RI insinuated its way into law and now can continue based on the false information that it’s simply sitting on a shelf, or the even more obvious stratagem of changing its name.  Remember that Governor Raimondo used a refinancing gimmick to produce the $80 million needed for part of her plan without the requirement of public consent, and some of her wealthy backers are helping to fund some of the planning stage, perhaps with reinforcement from the Boston Fed.

Decisions are being made that will affect every part of your life in Rhode Island.  You still have time (theoretically) to change the people making the decisions or to take their authority away for specific actions.  Many have already concluded that the only way to escape their authority is to leave, although the disinclination to stand up against them does not bode well for the hope that their approach won’t spread around the country and the world.

  • Rhett Hardwick

    I think it was Justice Holmes who referenced “That happiest figure in the law, a servant on an errand of his own” Seems like a fair description of an unprincipled agent.

  • ShannonEntropy

    The ‘Principle-Agent Problem’ is just an extension of Principle-Agent Capitalism

    Unless you can do every task or provide your every need yourself, in a free economy you will need to pay someone else a profit above cost to do it or provide it for you

    The “Problem” begins when that profit margin becomes excessive. Needing to “know a guy” and then pay that guy and then pay the guy who knew the guy etc etc etc … is what drives an otherwise thriving economy into the ground

    And it is a LOT easier to kill and bury an economy than to resurrect it

    Smooth the descent … and easy the way
    The Gates of Hell stand open Night and Day
    But to Return and view the cheery skies
    In this the Task and Mighty Labor lies

    Alfred Lord Tennyson … translation Virgil’s AENEID