Essay: Principal-Agent (PA) Theory

The Principal-Agent (PA) Theory outlines the relationship between two actors in an implementation process, wherein the principal (in this case: policy makers) makes policy decisions they want the agent (street-level bureaucrats) to execute. The Principal-Agent theory understands implementation in a technical and idealistic ‘top-down’ approach, but misses a few key considerations for understanding the implementation process. It assumes that there is always an information asymmetry between the principal and the agent, which results in policy implementation conflict in terms of the policy outcomes and policy impacts. Bottom-up policy implementers, on the other hand, associate the agents (SLBs) to be just as good as the policy they implement, as the policy’s target audience would associate the success of the policy to the way the agents make decisions, establish routines, and ultimately process implementation. The PA Theory sees the agents as tools to deliver the goals of the principal, and when the policy does not achieve its intended aims, it is assumed that there is an erroneous practice in the part of the agent.
The Principal Agent theory in public policy is often used to rationalize gaps in unsuccessful (or the lacking of success of) implementation process in favour of the top-down approach. The theory assumes that a rational act entails the execution of the principal’s decisions through agent’s action. However, it does not take into account other factors, which will be further discussed in the essay, that may lead to the agents taking differing courses of action, and conflict-ridden divergences of policy implementation. The PA model negatively perceives divergence, assuming that it is solely the result of an agent’s self-interested motives, and hence a ‘failure’ in the implementation of the policy. In this essay, I will argue that the PA theory is inadequate in modelling and understanding the policy implementation conflict from a bottom-up implementation approach. I will mainly discuss the ways in which SLBs’ discretion, emotion, situational and contextual reasoning fosters greater policy legitimacy, democratic legitimacy, and policy change that would be most fitting to the society in which the policy is implemented, and is not always as technical (and linear) as the PA theory assumes. However, although I argue that the PA theory has significant drawbacks in looking at the principal-agent relationship, I do not disregard the notion that the PAT has important and relevant points to make in the debate, despite its issue with one-dimensionality and parsimony that the traditional theory presumes.
The essay gathers the perspectives of a range of bottom-up and top-down scholars exploring the utility of the PA model in understanding policy implementation, while also exploring methods to improve the effectivity of public policy implementation (subject to the policy’s relevant contexts). The PA theory only assumes how divergence in policy implementation is a result of shrinking and/or sabotage of the current policy for personal gains or maximizing personal utility, hence resulting in the conflict of intended goals and outcomes. The following point would be most effective in light of today’s increasingly shifting organizational structures, causing a ‘new kind of professionalism’ due to this organizational change. The understanding of this shift is vital as it contextualises the essay’s point of the inadequacy of the PA theory in modelling conflict. With discretion defined to be the agents’ choice or judgment within recognized boundaries, this essay then argues that the practice and concept of discretion is of vital importance in understanding the work of street-level bureaucrats in avoiding implementation conflict, and successful policy implementation.
Among others, Gofen, Tummers & Bekkers, Holmstorm & Milgrom, and Knill, discuss the rigidity, one-dimensionality, and overly linear approach of the PA theory, and the importance of viewing policy implementation through the implementing agent (SLBs)’s perspective. The PAT regards divergence as a conflict of the agent’s rational-choice, however as Knill writes how the top-down approach is arguably a highly over-simplified model of political steering, further analysis for emotional and professional reasoning will be rationalized in explaining this divergence. The theory assumes a rational-choice approach, wherein the principal sets the intended policy goals and outcomes, and the SLB expected to carry out those policies in accordance to the principal’s demands. Gofen, incorporating Lipsky’s basic claim , states that the SLBs decisions, routines, and tools they use, effectively become a part of the policy they carry out, and hence the policies are regarded to be just as good as the implementers on the ground. Because policy implementation is tied so intricately with its implementing agents, street-level divergence is essentially inevitable, and essentially a process that follows implementation. This means that the more societal stakes the policy has, the more social and ethical responsibility the agents would feel towards the policy’s target community, and so would want to have the policy producing impacts and outcomes as meaningful as possible. ,
This is also appropriate through Knill’s argument in that policy objectives and instruments are expected to undergo modifications during the implementation process, due to the casual relationship between means and ends that is present in an implementation process, unlike in the PAT where it merely regards the principal and agent to have bureaucratic form-follows-function, causal relationship. Hill & Hupe (2009) adds to the argument that discretion increases meaningfulness, which enhances the agent’s willingness to implement policy, and given that the agents are fairly experienced, they should be allowed professional discretion as a part of their choice and consideration. The PA theory overly regards agents as individuals that seek personal benefit, and does not take into account enough the agents’ expertise (i.e. from local knowledge and experience) that they may utilize to focus on a different aspect of the policy impact, that diverges, or is conflicting, with that of the Principals’.
Implementation effectiveness varies across policy sectors; it can be argued how the PAT insufficiently takes into account the capacities of the agents in intervening and criticising their principals through divergence or non-compliance. This adds to how the PAT undermines the agents’ formal expertise and experience, which if continued, could result in these agents’ increasing policy alienation. The PAT’s top-down approach also systematically excludes the situational contexts the divergent agents are faced with on the street-level in times that they are required to make unforeseen decisions on the field. As policy implementation is – and should be – conducted alongside experiential knowledge and expertise in mind; creating, designing and implementing policy should thus be regarded as a bargaining process that both the agent and principal take part in, where utilizing both actors’ expertise will maximise the policy’s impact and outcome.
Though the bargaining and/or divergence process can arguably have a negative impact on fairness if only practiced through one individual agent, a collective pattern of divergence would increasingly validate those actions, and should be further analysed as there may be a greater agenda the agents believe the principals have overlooked. This is increasingly the case for sectors where high civic impact and social stakes are involved (i.e. Health & Welfare Sector), and where emotionality can be brought on. It is also part of Matland’s theory of conflict-ambiguity, where in situations of high-ambiguity regarding policy intersections, these expertise would be required to properly implement policy as is needed by the intended policy target.
As the PAT regards that conflict occurs due to information asymmetry and a disjuncture of policy objectives and impacts leading to non-compliance, the theory is very heavily individualistic and does not accurately explain collective discretion and its implications on the wider scope of policy legitimacy, democratic legitimacy, and policy change. Partly due to the rigid institutional design already in place that limits administrative capabilities, agents would tend to partake in ‘creative compliance’ to enable them to better and more strategically allocate and prioritize resources for the tasks the principal does not give enough attention to. Broadening the individualistic approach the PAT adopts, Rutz, Epstein & O’Halloran, Tummers & Bekkers, Hupe & Buffat, and Gofen discuss the implications of collective discretion on the overarching organization, and policy implications it may bring regarding policy legitimacy and policy change through democratic legitimacy in allowing for collective discretion. Where the PAT merely views divergence as an individual agent’s coping mechanism in facing the increasing pressures the job entails , the following section aims to increase macro-level contextual analyses on collective discretion.
With the increasing need for discretionary allowance and the importance of discretion in the principal-agent relationship, the PAT’s understanding of the policy implementation process does not discuss the broader debate about collective discretionary rooms and ‘discretionary floors’ within a typical agency. The PAT does not account for the degrees of discretion (and non-compliance) that vary across circumstance and sectors, where higher policy stakes often equates to a greater possibility and potential of ‘creative compliance’ – in the form of ‘discretion-as-perceived’ by the respected agents. Epstein & O’Halloran (1994) discuss the need for increased agent discretion, given information asymmetry and distant principal-agent relationship. Rutz (2015) also discusses more collective reasons of why an agent may diverge from the principal’s given policy goal; he claims how creating collectives gave inspectors additional skills and knowledge, as well as a broader mandate and repertoire, while permitting responsiveness and consistency.
Discretion in organizational structures in used situations of high complexity and ambiguity. SLBs are compelled to interpret and balance rules to take account of the consequences of their actions for the intended policy targets. Hence, discretion should not always be associated to self-serving policy alienation which implies a psychological disconnection of the policy’s professional implementation towards its target. As Tummers and other cited scholars argue, a too-individualistic explanation of discretion as a coping mechanism is not the only explanation to the implementation conflict. Relying too much on the PA Theory in condemning discretion, then, could result in a bureaucratic/coalition shift within the organization that would affect the organization’s administrative process as a whole if no compromise is made upon allowing discretion. As Hupe & Buffat (2013) have also claimed, the way in which discretion is granted influences the way discretion is used. If greater allowance is given towards agency discretion, agents would be able to go forth with imposing their own expertise on the implementation process in achieving policy impacts and outcomes as designed by the principal, and would need to rely on creative compliance less, through having a better causal relationship between the principal and agent, risking less organizational shift, while allowing for both greater policy change and policy legitimacy.
Through having analysing the PAT in a greater depth, this essay concludes that the use of the SLB’s discretion in understanding conflict and implementing policy is not as negative as the PAT assumes. Implementation conflict between the principal and the agent may be due to the greater need to be responsive to a specific case, but being unable to go through the formal policy procedures, due to its presumed overly linear and one-dimensional relationship. To overcome this, collective discretionary room is then important in establishing this response, where policy design and implementation should be a result of long-winded negotiations and granted discretion that should instead be encouraging ‘creative compliance’ when need be.
Having critiqued the PA approach, this essay does not disregard the fact that the PAT has important and relevant points to make, such as how it can be used to rationalize individuals’ ‘coping mechanisms’ that would result in negative effects to fairness and overall policy implementation , and also how this rationalization is useful in understanding and overcoming policy situations of high-conflict and low-ambiguity, where top-down structuring crucial in determining policy and implementation success. This is due to the need of clarifying policy impacts and outcomes for specific policy areas determined by the decisions of the principal. However, this is only relevant if the policy networks and external bodies involved can be properly identified, hence low ambiguity. Unfortunately, most policy implementation cases are indefinitely intertwined and highly ambiguous. So although discretion may be minimised in situations of low ambiguity, policy discretion would still occur indefinitely across all sectors of policy, though the extent to which it is granted or practiced may be subject to its given circumstance.
For further alternative approaches and a deeper analysis to non-compliance and discretion, I refer to Leadbeater and Goss’ (1998) coined term of ‘civic entrepreneurship’, defined as a form of front-line work taking place in the spaces of local governance where traditional organisational structures are breaking down and have not yet been firmly replaced. This may have a more sound prescription of the direction to which street-level bureaucracy is heading in the future, and the ‘new kind of professionalism’ that mentioned in the earlier part of this essay.
From this, I hope to have exemplified how the PAT does not accommodate for understanding conflict in policy implementation in a bottom-up approach to implementation due to its rigidly linear, one-dimensional, ‘individualistic’ rational-choice approach to divergence and non-compliance, while also disregarding situational context. This analysis then encourages the greater need of expanding upon the rigidities of the PA approach in understanding collective discretion, and hopes that through broadening the understanding of implementation conflict outside of the PA approach, a more holistic grasp of the principal-agent relationship – especially in establishing political legitimacy, democratic legitimacy, and policy change – could be further improved for future prospects of overcoming the conflicts within policy implementation.