Delegation is necessary but risky. When principals hand authority to agents, they face hidden types (adverse selection) and hidden actions (moral hazard). Explore how agency loss works and how institutions constrain it.
Principal-Agent Problem: The difficulties that arise when a principal delegates authority to an agent who (a) potentially has different goals than the principal, and (b) cannot be perfectly monitored. The gap between what the agent does and what a perfect agent would have done is called agency loss.
Configure positions on a 0–10 policy scale
Policy positions — the agent proposes her ideal; the principal accepts or reverts to status quo
Preset scenarios from the lecture
The chain of delegation in parliamentary democracies runs from citizens to civil servants. Each link involves a principal delegating to an agent, and each link introduces potential agency loss. A minister is simultaneously agent to some principals and principal to others.
Parliamentary chain of delegation
Adverse Selection
Hidden attributes — the agent type is unobserved before appointment.
Timing: Problem occurs before the agent is selected.
Example: A party leader cannot know if a candidate minister is truly competent or only appears so during selection.
Moral Hazard
Hidden actions — the agent behaviour is unobservable after appointment.
Timing: Problem occurs after the agent is selected.
Example: A minister pursues her party agenda rather than the coalition agreement, but the PM cannot monitor every departmental decision.
Key Insight: Multiple Principals
A minister in a coalition government serves multiple principals simultaneously: the coalition government, her own party, and her constituents. When these conflict, agency loss is almost inevitable and difficult to attribute to any single relationship.
Controlling agents: Principals use mechanisms both before and after delegation. Ex ante mechanisms help select the right agent, countering adverse selection. Ex post mechanisms monitor and correct behaviour after delegation, countering moral hazard.
Ex ante mechanisms — before delegation
Screening
Campaigns & Debates
Candidates reveal preferences and competence through public performance. Voters and party selectors observe and filter on this basis.
e.g. Committee hearings for ministerial appointments; candidate debates; investiture votes.
Selection Signals
Credentials & Background
Education, professional track record, and prior experience serve as observable proxies for unobservable competence and ideological reliability.
e.g. Finance portfolio assigned to economist; justice portfolio to lawyer.
Ex post mechanisms — after delegation
Police Patrol
Direct Monitoring
The principal systematically and continuously monitors the agent through hearings, cabinet minutes, and budget scrutiny. Costly but comprehensive.
e.g. Parliamentary committee scrutiny; PM cabinet office reviewing ministerial decisions.
Fire Alarm
Relying on Third Parties
The principal relies on media, junior ministers, and opposition to raise alarms when agents deviate. Cheaper than direct monitoring but reactive.
e.g. Junior ministers from a coalition partner placed in ministries to monitor the senior minister.
Coalition Agreements
Formal Policy Contracts
Written coalition agreements establish verifiable public commitments for each party. Parties that deviate face electoral punishment and risk coalition breakdown. They reduce shirking by creating clear benchmarks against which ministerial conduct can be measured.
e.g. Coalition agreements specifying policy positions, portfolio assignments, and dispute resolution — common in Germany, Netherlands, and Scandinavia.
Information asymmetry — when does each problem arise?
Key Insight: Successful Delegation vs Agency Loss
Delegation can be successful even when agency loss occurs — provided the outcome is still better for the principal than the status quo. The question is not "did the agent do exactly what I would have done?" but "am I better off than if I had not delegated at all?"