Remedying the Principal Agent Problem in the Public Sector Position Paper
Economists have devised many potentially clever solutions to the principal-agent problem, several of which involve addressing the conflicting-interest piece of the problem, by using incentives. Historically this made sense because the asymmetric information piece of the problem was considered too costly and difficult to resolve. The problem is not that the information does not exist. It does. But commonly it’s trapped in paper systems, reported in monthly or departmental aggregates, rife with “bad data,” and highly variable and complex. All of which makes it very difficult to detect, at a glance, if abuse is actually occurring. How can administrators tell the difference between good overtime and bad overtime? Anyone who has a received a FOIA request knows firsthand that it can be incredibly time-consuming and difficult to gather and analyze employee time-related data to locate problems — and exponentially more difficult to proactively manage on an ongoing basis. Administrators have traditionally dealt with this challenge by focusing on providing top-notch service to citizens rather than spending valuable time and resources chasing down potential abuse. They consider the problem to be a cost of doing business, similar to shrink in retail or bad debt in the financial industry.