The "Grabbing Hand": The Principal-Agent Theory and Corruption
In corruption research, the principal-agent theory analyses the interactions of individuals or groups in a socio-economic context (Rose-Ackerman, 1989), and it has been used to explain hierarchical relationships and individual actions in organisations and systems (Damijan, 2023, p.5). The theory has been extensively applied in sociology and public administration studies (Waterman & Meier, 1998).
The principal-agent model was developed in 1976 by Michael Jensen and William Meckling of Harvard Business School and the University of Rochester, respectively. A principal is the decision-making authority that enlists an agent to provide a service for the client (Klitgaard, 1988; Lambsdorff, 2001). The principal determines and negotiates who should be responsible for carrying out a specific function. Initial agreements between individuals may not conflict with a set of objectives, but the interests of the principal and agent may diverge. Hall & Lieberman (2007, p.399) argue that the agent intends to maximise their own “well-being” (i.e., profits). If, therefore, the decision to be corrupt is an individual one (Nas et al., 1986, p.109; Groenendijk, 1997, p.207; Stephenson, 2019) then skewing the procedures for self-interest is unethical.
Corruption is a phenomenon difficult to define but has multifaceted impacts on culture, democracy, and society. Viewed in economic terms, relevant to the principle-agent theory, it is an act considered “a crime of economic calculation” (Klitgaard et al., 2000, p.31, quoted in Bagchi, 2007, p.114) or “the sale of government officials of government property for personal gain” (Schleifer & Vishny, 1993, quoted in Zhang et al., 2023).
This article will give a basic overview of the principle-agent model and theory. It will discuss the theory’s relevance to modern-day institutional and individual corruption since the global adoption of New Public Management reforms in the 1980s, a neo-liberal function of government adopting private sector methods, which has significantly altered the delivery of public services.
The Principal-Agent Model
The research of the political corruption expert Susan Rose-Ackerman, during the 1970s, developed the principal-agent theory to incorporate corrupt interaction between the market and government (Avelino et al., 2012; Persson et al., 2012). It has since been the basis for studies of relationships in bureaucratic structures (Weingast, 1984; Waterman & Meier, 1998; Meier & Krause, 2003). The principal-agent theory is relevant for discussing the potential of corruption because it analyses the contractual agreement between a principal and an agent, or when authority is delegated between individuals (Groenendijk, 1997; Miller, N., 2005; Andersson, 2008). It is focused on economic incentives (Dollery & Wallis, 2001) and exchanges (Wright et al., 2001), and it can be used in conjunction with the rotten apple theory to view the choices of individuals or the influences of hierarchies.
Corruption subverts the processes of good governance (Sangita, 2002), thereby undermining administrative accountability and transparency, and “devalues humans” (Delurey, 2013). Most groups or organisations are organised as a hierarchy—the power relationship between employee(s) and their employers(s) (Andvig et al., 2000, p.103) or the flow of information (Bac, 1996, p.278)—with “binding working rules” (Groenendijk, 1997, p.207) determining individual actions, decisions, and interactions.
The basic principles of principal-agent highlight the role of the principal empowering an agent to carry out an act on their behalf or, in other terms, about contractual agreements: “The principal-agent relationship is governed by contract specifying what the agent should do and what the principal must do in return” (Perrow, 1986, p.224). Conflicts of interest can occur when a principal pays an agent to carry out a specific duty for the apparent benefit of the client. According to T’Serclaes & Jollands (2007, pp.28-29) of the Paris-based International Energy Agency (IEA), proponents of the theory identify three strengths: its adaptability to different organisational relationships; its ability to explain the behaviour of individuals; and its contribution to improving contractual agreements.
Any phase of the procedure regulating the purchase by an agent from a principal for the benefit of a client can be marred by corruption (Schleifer & Vishny, 1993; Porta & Vannucci, 1997, p.101). The theory is an understanding of what happens when authority is corruptly delegated from a principal to an agent (Andersson, 2008, p.203), taking into account the benefits and risks for the individuals (Damijan, 2023, p.5). While the roles of the agent and the principal can be interchangeable (Perrow, 1986), the principle of exchange remains the same. From a rational choice perspective, the theory “provides logical predictions about what individuals may do if placed in such a relationship” (Wright et al., 2001, p.41).
Risk and uncertainty can arise if the principal inadequately monitors the agent (Walton & Jones, 2017) or cannot enforce contractual standards (Rubin & Sheremeta, 2013). Consequently, if the agent misleads the principal or fails to uphold the contractual agreements, identified as “agency problems” (Bernhold & Wiesweg, 2021, p.117), the service or end product they provide the client is affected.
Yet, the agent may have an informational advantage (Bellaubi & Pahl-Wostl, 2017) with the ability to deceive the principal during negotiations to win the contract (Lambsdorff, 2001, p.6). This one-sided “information asymmetry” (Klitgaard, 1988; Persson et al., 2012) results in the agent possessing more information than the principal. The economic advantage for the agent thereby becomes the principal’s problem when, due to a lack of transparency and checks and balances, a principal cannot control an agent’s self-interest, or “agency costs” (Miller, 2005; Putra et al., 2018), from becoming corrupt.
Public accountability is “a specification of who is (or is supposed to be) accountable to whom” (Gailmard, 2012, p.3). Accountability is an essential component of principal-agent theory. It is not only for the principal to trust the agent to behave with legitimacy and productivity, but for both parties to be accountable to the client. Corruption can occur when any of these actions are not fulfilled, intentionally or through poor checks, by either the principal or the agent.
Controls
If the principal-agent theory seeks to “design contractual relationships between the principal and the agent as optimally as possible” (Bernhold & Wiesweg, 2021, p.117), then the rules controlling the interaction between principals and agents must be regularly reviewed, as outdated control systems can threaten organisational impartiality and transparency. There is a risk of corruption becoming “entrenched” (Fierro et al., 2024). However, establishing and implementing anti-corruption measures is difficult if individuals do not see themselves as corrupt or corruptible.
Conditions for individuals to engage in corruption are identified by Transparency International UK (2013) as: discretion in the decision-making process; sole responsibility for a particular decision; and the lack of accountability allowing their misconduct to go undetected. A flawed scrutiny system enables principals to exercise their entrusted power for private gain. Transparency of these increasingly secretive decisions, by “respectful behaviour” (Esaiasson, 2010, p.357) or “feedback mechanisms” (Sharkansky, 1972, p.8), would allow the client to see how these individuals make decisions and with whom they interact.
Criticisms of the Principal-Agent Theory
Similar to the study of corruption, the foundation of the principal-agent theory is based on assumptions (Wright et al., 2001; Waterman & Meier, 1998; Zogning, 2017) which may not equate to real-life situations. Not all corrupt acts can be explained using the simple principal-agent model (Teorell, 2007; Hayward & Taylor, 2021).
Critics of the theory, such as Lubatkin (2005) (quoted in T’Serclaes & Jollands, 2007), argue its explanation of interactions is too simplistic to correspond to the complexities of organisations and human nature. Furthermore, the principal-agent model’s focus on individual actions fails to account for the possible involvement of multiple actors (Nielson & Tierney, 2003, quoted in Elsig, 2010, pp.4-5).
Besides its narrow focus on individualism (Wright et al., 2001), another criticism of the principal-agent theory is its belief that monetary reward is the primary motivator for action (Lubatkin, 2005, quoted in T’Serclaes & Jollands, 2007), whereas humans can seek non-financial incentives for self-worth (Zogning, 2017).
New Public Management and Principle-Agent
Despite the theory’s detractors, its relevance in the study of corruption continues in modern public administrations that have adopted New Public Management (NPM), a neo-liberal function of government and business model since the 1980s that has significantly altered how governments and organisations deliver public services.
Under the guise of “innovation” (Petersen & Hjelmar, 2014), “decentralisation” (Alonso et al., 2011) and “consumer choice” (Rhodes, 1996), NPM—a term developed by Christopher Hood in 1991 (Hood, 1991)—promotes managerial values, individualism, competition, and flexibility. It is a system characterised by its core tenets of outsourcing (marketisation) and deregulation of the public sector to replicate “the pressure to improve which exists in the private sector” (Cowper & Samuels, 1996, p.2). Government regulations and procedures are replaced with private sector performance measurements, incentives, and cost savings (Ferlie, 2017; Lapuente & Walle, 2019), which its proponents believe will improve service delivery. Yet, these radical NPM reforms have increased corruption (Tambulasi, 2009; Loxbo, 2010; Dahlström & Lapuente, 2011; Ratmono & Darsono, 2022).
Outsourcing is when a private company is contracted to deliver a traditionally public service in exchange for a fee (Picard & Auriol, 2009). Therefore, since the principal-agent theory is an understanding of what happens when control is transferred between individuals, it is a tool that continues to be relevant to discussing contracts and agreements in the NPM system.
A reduced bureaucracy, the growing role of private businesses in public life, and greater autonomy from state control have significantly altered the role of modern public administrations and reflect the changing values of a society from serving the collective needs to that of the individual. By using the principal-agent theory to review the stages of the public procurement cycle—planning, design, bidding, evaluation, awarding, and implementation (Soudry 2007; Transparency International UK, 2013; Patraș & Bănacu, 2016)—the opportunity for corruption is created where (public) officials and (private) interests can engage in agreements without control mechanisms of checks and balances, scrutiny, and transparency. Outsourcing has also created the opportunity for individuals to acquire new sources of wealth with the drive for profits and gain taking precedence over the well-being of the public, who are now considered “customers” (Pupion, 2021) or “service users” (Box et al., 2001).
The lack of a global definition of what corruption is and what can be considered corrupt makes any study of this nature difficult, especially if the perpetrators believe they are innocent.
The businesslike NPM reforms adopted by government and public organisations since the 1980s, replacing the rigid and hierarchical "red tape" of bureaucracy, have created an atmosphere of secrecy in the negotiations between principal and agent. NPM's values of outsourcing, deregulation, and competition—requiring contractual agreements between individuals over the transfer of services—keep the individualist view of principal-agent theory relevant to the study of corruption.
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