Mar. 7 “The Bureaucracy’s Bosses”— as related to Agency Theory: A Market [Economic] Perspective An economic perspective enables us to examine patterns of interests and incentives related to particular organizational problems. This slide focuses on the basics of agency theory; the next applies agency theory (more typically used in the study of private companies) to the public sector—”The bureaucracy’s bosses.” Analogous to a market of buyers and sellers as a depiction of broader society, economic logic focuses attention on exchange relationships between those who perform tasks (sellers or agents) for buyers (or principals) Principals are those who want something. They can buy it (from an outside vendor or contractor) or use a bureaucracy to perform the task—in which case they are “bosses” who use people within bureaucracy to do it. In either case, it assumed that a contract (literal or figurative ) defines the terms of the deal. Agents are those who “promise” to do something—perform according to the contract. But their self-interest may lead them to shirk or cheat. Agency theory assumes that principals have problems getting agents to comply, because…. Information is a scarce resource—one party suffers from a lack of it and is therefore at a disadvantage (note: it is usually assumed that principals lack needed info.—but agents can lack it in some situations). Principals have to pay to get more or better information (or better monitor their agents—i.e., shorten their leash.” But information tends to be more quantitative than qualitative. Some related terms: Adverse selection; moral hazard Public Sector Applications Many public sector applications of agency theory involve the extent of political (policy maker) control over bureaucracy and its managers—in these applications, policy makers are princpals and agency managers are agents. Privatization—principals (like policy makers) could decide that agents inside bureaucracy are too expensive and/or uncontrollabe/decide to with private vendors Market vs. Hierarchy—two different organization forms; ways of thinking about public organization Accountability and Compliance—It would seem that principals would want as much compliance from bureaucrats or outside vendors as possible (short leash).Is that necessarily the case? Delegation (long leash)—When does it make sense to delegate a good deal of discretion (or ”leeway”) to agents?

Mar. 7 The Bureaucracy’s Bosses [Note: Since agency theory focuses on rational self-interest, you need to focus on the following in terms of the principal’s or agents “best” interests”—rahter than “the public interest”] The central question—”Would policy makers profit by making policy themselves (and micromanaging agency implementation) or by delegating a great deal of authority to bureaucratic agents? What Circumstances Matter? Complexity?? Why? Salience?? Why? Are there certain political advantages to delegating authority to bureaucrats— think strategically. How is bureaucratic delegation (or authority) checked by the following institutional bodies/forces? Presidential (or other executive) power? Legislative control? Judicial review and administrative law?