Principal-agent problem

Despite the apparent growth in corporate and public governance over the past 20 years, agents are acting ever less in the interests of their principals than in the past. In the corporate sector, the extent of rent seeking and corporate welfare grows ever larger, particularly in the financial sector. Whereas once capital market discipline and competition would provide some semblance of control over wayward managers, now they rely on the government to buttress their positions at the expense of their shareholders (and of course taxpayers). But at least shareholders have the option to dispose of their shares. But this rent seeking and corporate welfare helps keep relatively inefficient companies in play and prevent potentially more efficient companies from rising.

In the public sector, and this includes the numerous NGOs that rely almost entirely on the taxpayer, the situation is perhaps worse than at any point in modern industrial history. The public sector now acts in its own interests, expanding its remit with ever more intervention and control over the citizen. Vast international bureaucracies have been expanded, to offer more opportunities to extract rent from the unwilling taxpayer. And as we know, taxpayers have less opportunity to exit than shareholders, (although examples such as Gerard Depardieu moving to a small town (Nechin) in Belgium 1 km from the French border and about 260 km from Paris to escape a punitive new Hollande tax shows, at least in Europe, there are some opportunities in that direction).

Take the international financial crisis – despite the IMF, OECD, World Bank, BIS, etc, being absolutely wrong pre and post crisis, they continue to maintain their powers and privileges. If they operated in an efficient private sector, they would have been displaced long ago. I find it highly objectionable that these organisations which contributed to the crisis and did nothing to warn or mitigate the crisis have been able to use the crisis to expand their activities.

Then our freedoms are eroded, all under the pretense of encouraging diversity (which means anything but diversity of opinion), allowing this racket to expand and making it ever more difficult to criticise the racket.

The same applies in universities, with many faculties being shelter workshops for those who hold a common viewpoint – don’t expect much in the way of an intellectual debate in today’s universities. By expanding the number of students entering university, we have dumbed them down, particularly in the liberal arts which is now just a series of comparative literature exercises which are essentially meaningless. But which still consume resources.

I’m not sure how principals can reassert control over their agents – it is difficult to sack them.

I’m afraid that we are returning to a feudal society – one where a group of Lords (who have been selected for their lack of intellectual diversity) rule over the rest of us serfs. This mean that ever greater proportions of GDP will be extracted from the productive class to line the pockets of the Lords. But that in turn means that productivity will decline, GDP will reach a peak and then start to fall. The Lords will be extracting an ever larger proportion of a shrinking pie. The principals – the productive class – will be the future serfs.

UPDATE

Take HSBC as an example of the principal-agent problem. This article outlines the extraordinary money laundering operations the bank was pursuing, but instead of throwing a number of the managers into jail, the US Department of Justice merely levies a large fine on the bank. So the perpetrators of the crime – some managers – get away without any punishment, while the principals (the shareholders) have to pay the fine.

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J has an economics background and is a part-time consultant
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29 Responses to Principal-agent problem

  1. Max

    ” we are returning to a feudal society “

    Never before have so many people been sheltered from responsibility or the effects of their actions.

    In a feudal society people inventing mortgage back securities and selling them to all and sundry as a safe investments would have been hung or spent life in debtors prison.

  2. Bruce

    More likely we are revisiting the soviet system, where equality of outcomes is the rule and you can’t buy anything in the shops.

    Or maybe like China post Zheng He, where bureaucracy became stifling and a diaspora formed of entrepreneurial people escaping the weenies’ control. Chinese run most of the dynamic businesses in SE Asia, and increasingly in Africa too.

    Bye! See you in the Cayman Islands or Bermuda.

  3. 2dogs

    “I’m not sure how principals can reassert control over their agents”

    The problem is the Left blames Capitalism for the sins of the Principal-Agent problem. Notice how the Occupy movement started out as against the Principal-Agent problem, but was quickly diverted by the Left to be an attack on Capitalism.

    Nothing is ever done about the Principal-Agent problem because it is never found at fault.

  4. MACK1

    As Julie Novak has pointed out, so many people now rely directly or indirectly on one or other level of government for their income, that they have an incentive to vote for government expansion. This was always the case in Canberra, Hobart, Townsville and Darwin but now it’s everywhere. There is a real momentum now which is difficult to stop.

  5. Max

    Bye! See you in the Cayman Islands or Bermuda.

    When you consider that Aging Childless Feminist voters will enslave our sons via the taxation system in the west the only responsible thing for a parent to do is to move to Cayman, Bermuda, or Singapore. etc etc

  6. Max

    http://www.realclearmarkets.com/articles/2012/12/10/will_aging_childless_voters_enslave_my_future_grandchildren_100034.html

    Growing ranks of childless, single citizens are dealing themselves out of the cycle of life. This has never happened in all of human history. These people have no particular stake in the world they will one day leave behind. And yet they vote, in increasing numbers as they age.

  7. Max

    Sorry to over-post – final one from the same article

    “There are now more adult diapers sold in Japan than baby diapers. “

  8. thefrollickingmole

    One of my main bones of contention is against “good” institutions like the cancer council and red cross..

    The Red cross for instance receives a lot of government funding, and, somehow, is now staffed by a lot of ex-pollies in secure paid positions.

    I dont consider it a charity anymore, it may still be at the lower end, but higher up, its a patronage machine.

    The cancer council, well they exist to call for higher “sin” taxes, and the government obliges.

    Its strange, if smoking raises so much money, why the cancer council hasnt been calling for dedicated smokers hospitals, or massive funding for lung cancer research..

    I actively mistrust any organisation set up for “good” now, it would be nice not to have too but corruption has well and truly taken over.

  9. .

    Sorry max

    Like I said on the open thread.

    Will Aging Childless Voters Enslave My Future Grandchildren?

    We already have yummy mummies enslaving their own husbands and gay dudes with either hen pecking or taxpayer funded bonanzas.

    It’s every man for himself until the welfare state collapses.

    Sam J dislikes my linking to the Liberal Democratic Party of Australia (LDP) website, but I seriously reckon unless there is a strong shift to libertarianism, we may go down the road of the UK or France.

    I recommend that you all consider voting for or joining the Liberal Democratic Party of Australia (LDP).

  10. .

    Max

    Bermuda?

    This raises the five flag theory again.

    I discussed this with John Mc the other night, and I’d like to one day set up a libertarian charity, “a gulch for everyman” where we’d consult people on how to deal with petty fines and regulation, represent them in court, teach people how to minimise their taxes and offer tax planning and trust set ups for free, etc. We’d do free self managed super funds short of the APRA fees. We’d go the whole hog on things like issues of free speech and property rights, taking stuff to the higher courts. Part of the idea would be to choke, starve and emasculate onerous Government interference and taxation. If you clogged up the courts with hundreds of thousands of speeding fines for being under 5km/hr over the limit, the laws would change – not even the Government would out up with it.

    I think this is something the Australian Libertarian Society or Liberty Australia should try and offer, even as a joint venture with the LDP and CIS or IPA.

    There should be an intellectual, political, academic, service based and personal commitment (trying not to take subsidies or sue under unfair laws etc) to liberty.

    Gees. I’m almost thinking about rewriting this crap as a guest post!

  11. Max

    The Red cross for instance receives a lot of government funding, and, somehow, is now staffed by a lot of ex-pollies in secure paid positions.

    http://www.redcross.org.au/files/Financials_2011.pdf

    Page 44 lots of management earning $170K plus. not bad for a “not-for-profit” Head guy looks to be on $420K plus

  12. Max

    Thats a great Idea dot. do it!

  13. .

    Page 44 lots of management earning $170K plus. not bad for a “not-for-profit” Head guy looks to be on $420K plus

    That Billy Bragg arsehole will turn up and tell us being paid for blood donations is a bad thing, for us individually and socially.

    I’m in a bind. I still want to donate blood (and I know what good it does), but some psychic vampires from the ALP etc are literally feeding on that charity.

    It doesn’t feel right, actually giving your own body parts away, whislt some shiny arsed, career union clerk, Senatorial reject sucks up Government largesse in excess of the incompetent Mike Quigley, like a big, fat, slimy, European Carp.

    I’ve got the feeling I should charge the same rate as 1967 range per litre. So I’d get about $780 a pop.

  14. ugh

    “I discussed this with John Mc the other night, and I’d like to one day set up a libertarian charity, “a gulch for everyman” where we’d consult people on how to deal with petty fines and regulation, represent them in court, teach people how to minimise their taxes and offer tax planning and trust set ups for free, etc”

    Great idea Dot, I’m sure there’s a few cats that can contribute in some way…

  15. Max

    It doesn’t feel right, actually giving your own body parts away, whislt some shiny arsed, career union clerk, Senatorial reject sucks up Government largesse in excess of the incompetent Mike Quigley, like a big, fat, slimy, European Carp.

    Beautiful prose!

  16. Rococo Liberal

    Growing ranks of childless, single citizens are dealing themselves out of the cycle of life. This has never happened in all of human history.

    Yes it has. Demographic suicide is now recognised as one of the reasons for the collapse of the Roman Empire: the Italians, especially the upper classes stopped breeding.

  17. .

    I suppose I was a bit rude and ignorant. The Australian Taxpayer’s Alliance is making inroads to the goal I describe above.

  18. Token

    Demographic suicide is now recognised as one of the reasons for the collapse of the Roman Empire: the Italians, especially the upper classes stopped breeding.

    The elites of Rome also removed the burden of citizenship from the masses in Italy (tax, providing bread & serving in the army) and foisted it on an ever diminishing number of people away from the centre of the empire.

  19. .

    R.L.,

    Right you are. However, part of it was that the border regions where the army could recruit for much of legionaries and auxiliaries from, after the ‘reform’ of Diocleation, simply suffered from too much from high taxes and currency debasement and the barbarians out-competed Rome.

    Many simply hopped over the border, and 20+ years later, the capacity of the Roman army was much less. It didn’t take much longer to start falling apart at the seams, beginning with sparsely inhabited, poorly defended border towns.

  20. Scott

    Is it possible for independently minded people to act collectively to fight a collective force like Statism?

  21. Token

    Is it possible for independently minded people to act collectively to fight a collective force like Statism?

    We have the numbers, they are entrenched in the arms of government (i.e. bureaucracy, judiciary, media) and they have the power.

    Assymetric warfare over a longer period of time is the only approach that works in that case.

    We start by dialog via blogs to hone the message and them communicate it by every means possible.

  22. Token

    PS: That was not a call to arms or a death threat.

  23. Gab

    Nice thought, Token but isn’t that why Levenson is here? To support this government in placing restrictions on bloggers.

  24. Token

    Token but isn’t that why Levenson is here? To support this government in placing restrictions on bloggers.

    It’s very convenient that Levenson targeted the community which has the ability to provide a new level of dynamic transparency to the democratic process, isn’t it?

    Who here thinks Senator Red Underpants finds the message Levenson has attractive?

  25. Jannie

    For many years I financially supported and did ocassional work for the RSPCA. Then about 6-7 years ago I spat the dummy at the CAGW propaganda the younger activists were putting up at shops and clinics. Their logic was that animal welfare started with a sustainable planet. Politics was supposed to be taboo, but promoting Progessive attitudes was not political, it was good for plants and animals. Like manure I guess.

    But besides that, it was becoming evident to me that at management level the objectives of the organisation were becoming more about preserving the organisation. Most admin and animal lover type workers considered the business of raising money to be a tiresome distraction from their good work, and the government should fund it. A bit like the agent deciding it needs a more obedient principal.

  26. Luke

    Government being run for benefit of public servants – YES! I’ve witnessed it first hand at a State level and well aware of it at local levels too.

    There was a brief bit of being s#### scared under the new LNP government, but alas the QLD PS seem to confidently be back to their old games.

    And worst of all is the government legislating itself more and more fudge factor [room for error]. Not content to place a financial or other obligation on people, they want the power to impose it in a sloppy near enough is good enough fashion – which it’s not. No slack is given to the public and it certainly should not be given to the government with its wealth of resources to ensure it gets it right.

  27. thefrollickingmole

    Max:
    Tickners appointment was the last time the Red Cross got either blood or money from me.

    Hes a slug.

    Rococo Liberal:
    If you ad the Byzantines as part of the Roman empire you see a definitive time period where laws were actually enacted to prevent peasants taking holy orders.
    It was such a huge drain on both army manpower and taxation (future taxation as well) that a few Emperors passed restrictions.

    It was widely understood that one of the main reasons for the monasteries filling was taxation.

  28. Max

    Speaking of Nappies. Man living as an Adult baby wins fight for social security payments

    http://www.washingtontimes.com/news/2011/oct/18/man-living-as-an-adult-baby-is-cleared-of-social-s/?page=all

    this guy is effectively stealing from those who are truly disabled

  29. Christian

    One correction, if I may. Most universities make a heap of money from the liberal arts at the moment, including your own. It runs lean and fast, and you’ll find plenty of right-wingers and libertarians there. Just cross the road!

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