“Agency Theory” extended and updated

agencytheory

The Agency Theory has been studied with a focused attention in the economic environment. Used to describe, and hopefully align, the potentially conflicting interests of the parties tied by a contract. Examples can be innumerable, let’s just stop at two of them: manager and shareholders, worker and employer.

Different types of compensation have been designed to align the interests of the parties involved, out of this we have the variable part of the total compensation both for the employee and for the CEO, we also have recently added the long term incentives, up to the claw back possibility (latest, clear event, still under discussion, Wells Fargo).

Trying to carry the theory marginally out of its most standard environment, we can dedicate some attention to the political world: the elected citizen receives a mandate from a part of the voters and the written rules explain that, after his election, the interest of the elected should be naturally aligned to the interest of the whole community, regardless if they voted for him or not. Some studies show that this is not the reality, the elected (single or team) seems to historically have acted in the interest of his/her electors.

Fast forward: is it still like that? Is the politician we face still maximizing the utility function of his/her electors? if not, which utility function is he/she maximizing? are we measuring it? does any form of claw back exist for the politician?

 

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