Blame the Principals

“Principal-agent problems” are economists’ favorite explanation for poor political performance. Voters (“the principals”) lack the tools to keep politicians (“the agents”) in line. Some years ago, though, I argued that the main principal-agent problems of politics are largely solvable. The real problem is that in politics, common sense is not so common. Voters are, in technical terms, irrational. They’re irrational about what policies they favor, and they’re also irrational about how they discipline politicians to deliver those policies.

Since I predictably believe that the world has paid insufficient attention to these insights, this seems like a good time to say them again. Footnotes from the original review-essay omitted.

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At this point, one could easily object: Even if blatant voter irrationality is the main source of inefficient policy, the principal–agent literature is easy to salvage. We can simply take the models in PA (Tim Besley’s Principled Agents?), suitably modify the rational expectations assumption, then solve the revised model. This will eventually lead to a nuanced behavioral political economy of the kind that Besley (2006: 172) briefly alludes to.

While this plan sounds reasonable enough, it takes too much for granted. It assumes that agency problems are basically inevitable. We can cope with them, but there is no way of solving any of them. In this section, however, I argue that political agency problems are often a byproduct of voter irrationality. The principals give their agents grossly suboptimal incentives, then complain that the agents fail to carry out their assignments.

For example, a key feature of the main models in PA is that there is no pay-for performance. No matter how good or bad a job a politician does, he gets the same compensation.

Admittedly, this is a standard feature of modern democracies. But why is it a standard feature? Because it is too hard to evaluate politicians’ job performance? If so, using re-election as a carrot is equally misguided. Because it is too hard to assign optimal weights to various aspects of job performance? If so, one could simply “let the people decide” the optimal weights by basing bonuses on approval ratings. Because politicians’ actions have long-run consequences? If so, bonuses could be a function of long-run consequences. Politicians could continue to earn bonuses long after they have left office (which would also be a good way to handle end-game problems).

Some better arguments against paying politicians for performance may exist (Hart et al. 1997). However, the flimsiness of the leading objections should open us up to a simple alternative: Pay-for-performance is a good idea, but the public is too irrational to accept it. As Caplan (2001: 323) explains:

Many [voters] prefer to see politicians as altruistic public servants, a breed apart from the self-interested inhabitants of the non-political world. Given public choice scholars’ determined efforts to discredit this viewpoint, they can hardly argue that this mistake is not widespread.

Parallel arguments apply to many other so-called agency problems: Simple solutions exist, but the public negligently ignores them. The following are examples.

Politicians have many opportunities to abuse their power, and monitoring is costly. This is no reason to despair; as Gary Becker (1968) explained, we can use probability multipliers to make good behavior incentive-compatible despite imperfect information. Indeed, considering how often politicians’ scandals and insensitive remarks provoke “public outcry,” voters already act as if they understand the Beckerian strategy. So why can they not use the same approach to deter politicians from abusing their power?

Power is too decentralized for Beckerian punishments to work; there is too much “team production.” This seems like a reasonable objection, especially in polities like the USA with extensive division of powers and consequent gridlock. However, this just raises another question: If decentralization makes it hard to assign credit and blame, the obvious solution is to centralize. Indeed, many democracies already have parliamentary systems where responsibility is quite transparent; why not copy them?

Beckerian punishments violate the constitutional prohibition against cruel and unusual punishment. Efficiency wage models (Shapiro and Stiglitz 1984) point to a simple solution: drastically raise politicians’ salaries, then threaten to deprive them of their rents if they misbehave.

Politicians cannot make binding commitments, leading to time inconsistency and other problems. Again, this accurately describes modern political reality. However, the obvious solution is to change the law so that politicians can make binding commitments. Why not (Landsburg 1993: 148–9)?

My point is not that any of these reforms are likely to happen. Indeed, I expect them to fall on deaf ears. My claim, rather, is that plausible solutions to political agency problems are at hand, but public opinion stands in the way. Political agency problems are probably not a major independent source of political failure because they usually require voter irrationality to get off the ground.