FORUM2 – Article Example
Principal-Agent Theory al Affiliation Developing countries have established the Public Expenditure Management (PEM) systemsin to their government institutions. However, in order to regulate the proper implementation of the PEM’s, there is need to draw a clear boundary of issues related to the PEM’s by clarifying and resolving them accordingly. This in turn will allow for the priority to be given to the PEM reforms agenda. It is imperative to note that the principal-agent theoretical network plays a great role in this. For clarity, in the issue of bad governance and corruption there is misaligned information and also separation of interests between those who perform the tasks and those to whom the tasks are being performed. As an example, in a government structure, the Ministry of Finance will control and regulate the spending of other ministries. Given a ministry presents an issue and they consequently understand the nature, they adopt the principal agent theory to solve, with audits done when misuse is prevalent. My understanding of the principal-agent theory is that there are two players involved, these are agents and principals. In order to collectively achieve a purpose and cancel out the moral hazards and adverse selections presented within a government institution’s role to the public sector, there is need to interact, converse and come up with an innovative strategy. This serves as the principal-agent idea and it results to creation of a service that has value. I strongly believe that the principal-agent theory is the solution to the problems surfacing in both corporate and governmental sectors and should be ardently put into use (Leruth & Paul, 2007).
Most beneficial areas that need more the Principal-Agent Theory implemented include the likes of government institutions, corporate entities, school systems, banks, management hierarchies (Leruth & Paul, 2007). Ministers and other top corporate individuals are given the power to have control over their inferiors. In this regard, they act as the principals supposed to watch over the functioning and performance of their agents - these include employees working in their esteemed organizations, ministries and also other corporate entities. In terms of contracts, there is the need to look into observables which serve as the main element. Principal-Agent Theory in this case finds indicators which are proportionately beneficial for the contracts success (Jane-Erik).
Identifying a principal and an agent is more logical in an organization. Generally, the idea of Principal-Agent Theory is inherent in politics and administration. There is need to understand its relevance to the government functioning. What really happens in the government is that they are governed by their output to the public sector that elected them to power. Governments act as the principals in this regard. They thus need to hire agents to complete their mission which basically involve allocation and also distribution goals. Governed by policies which relate well with the transaction costs and also income support, the government through the hired agents working in various public administration sectors embark to achieve excellence. It is imperative to note that an agent will only work for his principal aggressively only if he/she is rewarded well. This reward comes in form of stipends and incentives that match his/her efforts (Jane-Erik).
In conclusion, there is need to embrace the Principal-Agent Theory since it helps a lot in the implementation of policies that will enhance performance, be it in government, corporate entities and also schools and other public administered domains.
Jan-Erik Lane. Relevance of the Principal-Agent Framework to Public Policy and Implementation.
Leruth Luc, Paul Elisabeth (2007). A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries. OECD Journal on Budgeting. Volume 7 – No. 3 © OECD 2007.