The Agency Theory

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What Is the Principal-Agent Problem?

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While there is likely no deep underlying message or meaning to the straightforward, twenty-two minute comedy, the theory seems to have staying power because it actually does make some good points. The character is played for laughs as they all are , but Phoebe has led a truly tragic life prior to the events of the show. Her mother committed suicide when she was a child and she spent her teen years living on the streets and in cars. She casually throws out stories about getting hepatitis from a pimp, stabbing a cop who stabbed her first and being chased by a murderous escaped mental patient for her sweet sixteen as though these are normal jokes.

All of this is to say that while it is a wild theory, it is not completely impossible to see how fans came up with it. Understanding the mechanisms that create problems helps businesses develop better corporate policy. To determine whether or not an agent acts in their principal's best interest, the standard of "agency loss" has emerged as a commonly used metric. Strictly defined, agency loss is the difference between the optimal results for the principal and the consequences of the agent's behavior. For example, when an agent routinely performs with the principal's best interest in mind, agency loss is zero. But the further an agent's actions diverge from the principal's best interests, the greater the agency loss becomes.

Agency loss drops when the following situations occur:. If neither of these events occurs, agency loss is likely to climb. Therefore, the chief challenge involves persuading agents to prioritize their principal's best interest while placing their self-interest second. If done correctly, the agent will nurture their principal's wealth, while incidentally enriching their bottom lines. Business Essentials. Health Insurance. Behavioral Economics. Your Money. Personal Finance. Your Practice.

Popular Courses. Civilian control, then, is the independent variable for the subsequent dependent variable of military effectiveness. If civilian control is the critical variable for military effectiveness, it raises the question of how civilian control is then to be determined. Huntington identified two shaping forces or imperatives for civilian control — 1 functional and 2 societal. He broke the societal imperative into two components, ideology and structure. By ideology, he meant a world-view or paradigm: liberal anti-military, conservative pro-military, fascist pro-military, and Marxist anti-military.

By structure, he meant the legal-constitutional framework that guided political affairs generally and civil-military affairs specifically. According to Huntington and early studies of civil-military relationships, it is considered that effective civil-military relations should be in the form of objective civilian control over their armed forces. This control is indicated by the following factors; 1 the military's adoption of professional ethos and their recognition of boundaries of professional roles, 2 effective subordination of the military to civilian political leadership that formulates strategic directives on foreign and military policies, 3 recognition and approval from political leaders to the professional authorities and autonomy of the military and 4 minimal intervention of the military in politics and of politicians in military affairs.

If Huntington's imperatives are the independent variables, then the variable of civilian control becomes, in turn, an explanatory variable for military security. However, Huntington says that both societal imperatives, ideology, and structure, are unchanging, at least in the American case. If that is the case, then the functional imperative is fully explanatory for changes in civilian control and subsequently military security.

In short, if external threats are low, liberal ideology "extirpates" or eliminates military forces. If external threats are high, liberal ideology produces a "transmutation" effect that will re-create the military in accordance with liberalism, but in such a form that it will lose its "peculiarly military characteristics. With the understanding that the rise of the Soviet Union created a long-term threat, Huntington concluded that the liberal society of the United States would fail to create adequate military forces to ensure security over the long term. The only circumstance he could foresee that would permit adequate military security was for the United States to change the societal imperative.

Risa Brooks argues that the health of civil-military relations is best judged by whether there is a i preference divergence between military and political leaders, and ii whether there is a power imbalance. She argues that the healthiest arrangement of civil-military relations is when the preferences between military and political leaders is low, and political leaders have a dominant power advantage. She argues that the worst kind of civil-military relations is when there is high preference divergence, as well as a power balance between the military and political leaders. The other principal thread within the civil-military theoretical debate was that generated in by Morris Janowitz in The Professional Soldier. Since the military world as he saw it was fundamentally conservative, it would resist change and not adapt as rapidly as the more open and unstructured civilian society to changes in the world.

Thus, according to Janowitz, the military would benefit from exactly what Huntington argued against — outside intervention. Janowitz introduced a theory of convergence, arguing that the military, despite the extremely slow pace of change, was in fact changing even without external pressure. Convergence theory postulated either a civilianization of the military or a militarization of society [67] [70] [76] [83] [84] However, despite this convergence, Janowitz insisted that the military world would retain certain essential differences from the civilian and that it would remain recognizably military in nature.

Janowitz agreed with Huntington that, because of the fundamental differences between the civilian and military worlds, clashes would develop which would diminish the goal of civilian control of the military. His answer was to ensure that convergence occurred, thus ensuring that the military world would be imbued with the norms and expectations of the society that created it. He encouraged use of conscription, which would bring a wide variety of individuals into the military. He also encouraged the use of more Reserve Officer Training Corps ROTC programs at colleges and universities to ensure that the military academies did not have a monopoly on the type of officer, particularly the senior general officer and flag officer leadership positions, in the military services.

He specifically encouraged the development of ROTC programs in the more elite universities, so that the broader influences of society would be represented by the officer corps. The more such societal influences present within the military culture, the smaller the attitudinal differences between the two worlds and the greater the chance of civilians maintaining control over the military. Janowitz, like Huntington, believed that the civilian and military worlds were different from one another; while Huntington developed a theory to control the difference, Janowitz developed a theory to diminish the difference.

In response to Huntington's position on the functional imperative, Janowitz concluded that in the new nuclear age, the United States was going to have to be able to deliver both strategic deterrence and an ability to participate in limited wars. Such a regime, new in American history, was going to require a new military self-conception, the constabulary concept: "The military establishment becomes a constabulary force when it is continuously prepared to act, committed to the minimum use of force, and seeks viable international relations, rather than victory The military, instead of viewing itself as a fire company to be called out in emergency, would then be required to imagine itself in the role of a police force, albeit on the international level rather than domestically.

The role of the civilian elite would be to interact closely with the military elite so as to ensure a new and higher standard of professional military education, one that would ensure that military professionals were more closely attuned to the ideals and norms of civilian society. This hypothesis evolved into the Postmodern Military Model , which helped predict the course of civil-military relations after the end of the Cold War.

An institutional model presents the military as an organization highly divergent from civilian society while an occupational model presents the military more convergent with civilian structures. While Moskos did not propose that the military was ever "entirely separate or entirely coterminous with civilian society", the use of a scale helped better to highlight the changing interface between the armed forces and society. The Vietnam War opened deep arguments about civil-military relations that continue to exert powerful influences today.

One centered on a contention within military circles that the United States lost the war because of unnecessary civilian meddling in military matters. It was argued that the civilian leadership failed to understand how to use military force and improperly restrained the use of force in achieving victory. Among the first to analyze the war critically was Harry Summers , [91] who used Clausewitz as his theoretical basis. He argued that the principal reason for the loss of the Vietnam War was a failure on the part of the political leadership to understand the goal, which was victory. The Army, always successful on the battlefield, ultimately did not achieve victory because it was misused and misunderstood. Summers argued that the conduct of the war violated many classical principals as described by Clausewitz, [22] thereby contributing to failure.

He ended his analysis with a "quintessential strategic lesson learned": that the Army must become "masters of the profession of arms," thus reinforcing an idea along the lines of Huntington's argument for strengthening military professionalism. McMaster [92] observed that it was easier for officers in the Gulf War to connect national policy to the actual fighting than was the case during Vietnam. He concluded that the Vietnam War had actually been lost in Washington, D. McMaster, who urged a more direct debate between civilians and the military on defense policy and actions, and Summers, who argued for a clear separation between civilians and the military, both pointed out controversies over the proper roles of civilian and military leaders.

Despite those controversies and the apparent lessons learned from the Vietnam War, some theorists recognized a significant problem with Huntington's theory insofar as it appears to question the notion of a separate, apolitical professional military. While there is little argument that separate civilian and military worlds exist, there is significant debate about the proper interaction between the two. As discussed above, Huntington proposed that the ideal arrangement was one whereby civilian political leaders provided objective control to the military leadership and then stepped back to permit the experts in violence to do what was most effective. He further stated that the most dangerous arrangement was one whereby civilian leaders intruded extensively in the military world, creating a situation whereby the military leadership was not politically neutral and security of the nation was thus threatened both by an ineffective military and by provoking the military to avoid taking orders.

Arguably, however, and despite Huntington's urging otherwise, U. During that time, the military elite had been extensively involved in the politics of defense budgets and management, and yet the United States had managed to emerge successfully from the Cold War. Despite that, none of Huntington's more dire predictions had proven true. In response to this apparent "puzzle," Peter D.

Feaver [93] [94] [95] laid out an agency theory of civil-military relations, which he argued should replace Huntington's institutional theory. Taking a rationalist approach, he used a principal-agent framework, drawn from microeconomics , to explore how actors in a superior position influence those in a subordinate role. He used the concepts of "working" and "shirking" to explain the actions of the subordinate.

In his construct, the principal is the civilian leadership that has the responsibility of establishing policy. The agent is the military that will work — carry out the designated task — or shirk — evading the principal's wishes and carrying out actions that further the military's own interests. Shirking at its worst may be disobedience, but Feaver includes such things as "foot-dragging" and leaks to the press.

The problem for the principal is how to ensure that the agent is doing what the principal wants done. Agency theory predicts that if the costs of monitoring the agent are low, the principal will use intrusive methods of control. Intrusive methods include, for the executive branch, such things as inspections, reports, reviews of military plans, and detailed control of the budget, and for Congress, committee oversight hearings and requiring routine reports. For the military agent, if the likelihood that shirking will be detected by the civilian principal is high or if the perceived costs of being punished are too high, the likelihood of shirking is low. Feaver argued that his theory was different from other theories or models in that it was purely deductive, based on democratic theory rather than on anecdotal evidence, and better enabled analysis of day-to-day decisions and actions on the part of the civilian and military leadership.

Huntington concentrated on the relationship between civilian leadership and the military qua institution while Janowitz focused on the relationship of the military qua individuals to American society. Agency theory provided a link between the two enabling an explanation of how civil-military relations work on a day-to-day basis. Specifically, agency theory would predict that the result of a regime of intrusive monitoring by the civilian leadership combined with shirking on the part of the military would result in the highest levels of civil-military conflict. Feaver [93] suggested that post-Cold War developments had so profoundly reduced the perceived costs of monitoring and reduced the perceived expectation of punishment that the gap between what civilians ask the military to do and what the military would prefer to do had increased to unprecedented levels.

After observing that most civil-military theory assumes that the civilian and military worlds must necessarily be separate, both physically and ideologically, Rebecca L. Schiff offered a new theory—Concordance—as an alternative. Most scholars agree with the theory of objective civilian control of the military Huntington , which focuses on the separation of civil and military institutions. Such a view concentrates and relies heavily on the U. Schiff provides an alternative theory, from both institutional and cultural perspectives, that explains the U. While concordance theory does not preclude a separation between the civilian and military worlds, it does not require such a state to exist.

She argues that three societal institutions— 1 the military , 2 political elites , and 3 the citizenry must aim for a cooperative arrangement and some agreement on four primary indicators:. If agreement occurs among the three partners with respect to the four indicators, domestic military intervention is less likely to occur. In her book, The Military and Domestic Politics , she applied her theory to six international historical cases studies: U. Concordance theory has been applied to emerging democracies, which have more immediate threat of coups.

At the heart of civil-military relations is the problem of how a civilian government can control and remain safe from the military institution it created for its own protection. A military force that is strong enough to do what is asked of it must not also pose a danger to the controlling government. This poses the paradox that "because we fear others we create an institution of violence to protect us, but then we fear the very institution we created for protection". The solution to this problem throughout most of American history was to keep its standing army small, relying on augmentation from militias the predecessor of modern-day Reserve forces, to include the National Guard and volunteers. While armed forces were built up during wartime, the pattern after every war up to and including World War II was to demobilize quickly and return to something approaching pre-war force levels.

However, with the advent of the Cold War in the s, the need to create and maintain a sizable peacetime military force engendered new concerns of militarism and about how such a large force would affect civil-military relations in the United States. For the first time in American history, the problem of civil-military relations would have to be managed during peacetime. The men who wrote the Constitution of the United States were fearful of large standing armies , legislatures that had too much power, and perhaps most of all, a powerful executive who might be able to wage war on his own authority.

All were objects of concern because of the dangers each posed to liberal democracy and a free citizenry. While it is often impossible to "gauge accurately the intent of the Framers", [] it is nevertheless important to understand the motivations and concerns of the writers with respect to the appropriate relationship between civil and military authority. The Federalist Papers provide a helpful view of how they understood the relationship between civil authority, as represented by the executive branch and the legislature, and military authority. In Federalist No. In his principal argument for the ratification of the proposed constitution, he argued that only by maintaining a strong union could the new country avoid such a pitfall.

Using the European experience as a negative example and the British experience as a positive one, he presented the idea of a strong nation protected by a navy with no need of a standing army. The implication was that control of a large military force is, at best, difficult and expensive, and at worst invites war and division. He foresaw the necessity of creating a civilian government that kept the military at a distance. James Madison , another writer of several of the Federalist Papers , [] expressed his concern about a standing military in comments before the Constitutional Convention in June In time of actual war, great discretionary powers are constantly given to the Executive Magistrate.

Constant apprehension of War, has the same tendency to render the head too large for the body. A standing military force, with an overgrown Executive, will not long be safe companions to liberty. The means of defense against foreign danger, have been always the instruments of tyranny at home. Among the Romans it was a standing maxim to excite a war, whenever a revolt was apprehended. Throughout all Europe, the armies kept up under the pretext of defending, have enslaved the people. The United States Constitution placed considerable limitations on the legislature. Coming from a tradition of legislative superiority in government, many were concerned that the proposed Constitution would place so many limitations on the legislature that it would become impossible for such a body to prevent an executive from starting a war.

Hamilton argued in Federalist No. James Madison, in Federalist No. Finally, in Federalist No. Institutions must be in place to check incompetent or malevolent leaders. Most importantly, no single branch of government ought to have control over any single aspect of governing. Thus, all three branches of government must have some control over the military, and the system of checks and balances maintained among the other branches would serve to help control the military.

Hamilton and Madison thus had two major concerns: 1 the detrimental effect on liberty and democracy of a large standing army and 2 the ability of an unchecked legislature or executive to take the country to war precipitously. These concerns drove American military policy for the first century and a half of the country's existence. Until the s, the maintenance of a large military force by the United States was an exceptional circumstance and was restricted to times of war. Following every war up to and including World War II, the military was quickly demobilized and reduced to near pre-war levels.

Most debates in civil-military relations assumed that a separation between the civilian and military worlds was inevitable and likely necessary. The argument had been over whether to control the gap between the two worlds Huntington or to minimize the gap by enacting certain policies Janowitz. Following the end of the Cold War in , however, the discussion began to focus on the nature of the apparent gap between civilian and military cultures and, more specifically, whether that gap had reached such proportions as to pose a danger to civilian control of the military. Part of the debate was based on the cultural differences between the more liberal civilian society and the conservative military society, and on the recognition that such differences had apparently become more pronounced than in past years.

He was perhaps most influential with his definition of militarism , which he described as the state of a society that "ranks military institutions and ways above the prevailing attitudes of civilian life and carries the military mentality into the civilian sphere.