Agency problem - A Glossary of Political Economy Terms

Examples of some techniques commonly used to overcome or alleviate the agency problem would include: (1) profit-sharing bonuses, contingency fees, sales commissions, merit raises, executive stock options and various other contractually specified methods of setting the amount of the agent's financial compensation in proportion to measurable results; (2) organizational hiring and promotion policies for people in responsible positions (agents) that emphasize identifying and selecting candidates whose reputation (based ideally on past performance) indicate they are "well-motivated,""dedicated to the ethics of the profession," and generally "of good character" -- i.e., people who feel a strong sense of moral obligation to do their best to do what they have promised to do, even when no one is likely to be watching; (3) institutional arrangements of accountability (such as boards of directors, auditing committees, inspector generals' offices, professional society ethics committees, and government regulatory boards) for detecting and then punishing extreme dereliction of duty, either by simply firing and disgracing (or perhaps de-licensing) the unworthy agent or possibly by aggressively pursuing civil or criminal penalties through the courts; (4) arrangements such as elections whereby the recent performance of the agent may be periodically scrutinized by his or her principals and competing candidates for the job may be allowed to make their case for replacing the incumbent agent by revealing his or her shortcomings and showing how performance might be improved through a change in command. More...