Monday, June 16, 2008

Agency Problem

Matt Yglesias, on the problem (well, one of them) with the McCain campaign:

The issue, basically, is that the odds are that McCain will lose. But thanks to realignment and so forth, the odds are very strongly against a true blowout. Consequently, McCain needs to choose between playing it safe and piloting himself to landing at 47 percent of the vote, or doing some outside-the-box that risks blowing up his coalition and leaving him with only 40 percent but also provides an outside chance that the gamble will pay off. The rational choice is for McCain to play to win. But his problem is that his campaign is going to be run by professional political operatives. If these guys run a respectable campaign and lose at 47, nobody's going to blame them -- McCain was facing an ultra-charismatic opponent in an adverse political climate. But if they run an outside-the-box campaign and wind up losing in a landslide, then their reputations might be badly hurt.

"Agency Problem," from A Glossary of Political Economy Terms:
Also sometimes referred to as the principal-agent problem. The difficult but extremely important and recurrent organizational design problem of how organizations can structure incentives so that people (“agents”) who are placed in control over resources that are not their own with a contractual obligation to use these resources in the interests of some other person or group of people actually will perform this obligation as promised — instead of using their delegated authority over other people's resources to feather their own nests at the expense of those whose interests they are supposed to be serving (their “principals”). Enforcing such contracts will involve transaction costs (often referred to as agency costs), and these costs may sometimes be very high indeed.

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