Principal agent theory

Yu Mingjie 2008. Research on Safety Input Incentive Mechanism Based on the Principal-agent Theory of Coal Mine. Xi an Xi an University of Science and Technology Press (in Chinese). 

We have built a model of principal—agent theory on the assumption that the NDA and Site Licensed Companies are risk neutral. It has been shown that under this setting, the cost of risk related when an adverse social and environmental outcome is realized, is fully home by the SLC s. The optimal investment in risk reduction maximizes the payoff of the NDA and SLC s preventing inefficiency associated with asyrmnetric information. 

A model is developed initially based on the Principal-Agent Theory. The results of the empirical study are incorporated in the development of this model. The model is then employed to evaluate the effects of the instruments on opportunistic behaviour, both the direct and the indirect effects. The indirect effects are evaluated by introducing the construct asyrmnetric information as a mediating variable. The model is then tested against data from a questionnaire-based study. A structural equation modelling approach is employed as this is considered to be especially suited for this purpose. 

The Principal-Agent Theory serves as the theoretical basis for the model (Eisenhardt 1989). This theory helps to explain the occurrence of opportunistic behaviour between a principal and an agent as a resrrlt of asynrmetric infomration between partners within the supply network. Actiorts to reduce asymmetric information within supply networks are proposed as an approach to coping with or managing the risks of opporttmistic behaviottr. 

Since the Principal-Agent Theory explains the functional and dysfunctional behaviour of partners in Principal-Agent-Relationships, it is able to explain the opportunistic behaviour of partners (Jensen and Meckling 1976). Therefore, it provides a valuable theoretical basis for the model of this chapter. Regarding the second objective of this chapter the Principal-Agent Theory contributes to determining the central hypotheses. 

A branch of social theory called principal-agent analysis is devoted to the various techniques by which one person can be persuaded to do another person s bidding. As one might imagine, its most immediate applications have been in management science. 

A detailed discussion of principal-agent and incentives theory is beyond the scope of this work. Koran application of incentive theory within the framework of regulations and government procurement, see A Theory of Incentives, which is also the theoretical foundation for the discussion on principal-agent problem in Public-Private Partnerships in IMF WFIoglrjy. 

The last ten years have witnessed a considerable growth in the number of publications that utilize techniques from economics in the study of production and operations system. A central tool in these studies is the principal-agent model which focused on problems of decentralization when there are information asymmetries when one party is better informed than a second party. However, most of the OM problems that are of considerable interest do not fit neatly into the principal-agent models utilized in economic theory. Specifically, most theoretical economic models assume that the information asymmetries are either of hidden action (moral hazard) or of hidden system parameters (adverse selection). Further, these models focus almost exclusively in static economic environments or very simplified dynamic environments. In real-life operational systems, information asymmetry cannot be neatly categorized as in the theoretical models, and the dynamic environment is, in general, complex and multifaceted. 

At the core of the principal-agent dilemma is the theory of complicity, which attributes liability to a State that was complicit in a private act. Hugo Grotius (1583-1645), founder of the modem natural law theory, first formulated this theory... 

In established franchised distribution channels, a primary source of control lies in the extent to which the principal attempts to monitor the action of agents (Gal-Or, 1995). Agency theory (Eisenhardt, 1989) and transaction cost analysis (Williamson, 1985) offer evidence that investments in monitoring limit opportunism and raise... 

Laffont, J.J. Martimort, D., 2001. The theory of incentives the principal and agent model. Princeton Princeton University Press. 

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