The Principal's Moral Hazard: Constraints on the Use of Incentives in Hierarchy

Miller, Gary J.; Whitford, Andrew B.
April 2007
Journal of Public Administration Research & Theory;Apr2007, Vol. 17 Issue 2, p213
Academic Journal
Pure incentive schemes rely on the agent's self-interest, rather than more coercive control, to motivate subordinates. Yet most organizations, and in particular public agencies, rely very little on pure incentive contracts and instead use coercive mechanisms of monitoring and sanctioning that many theorists find objectionable. We use principal-agency theory to investigate the problem. Principal-agency theory has tacitly assumed throughout that it is in the principal's interests to find a set of incentives that induce efficient levels of effort from the agent. We show that this is not necessarily the case. We identify a problem we denote as "the principal's moral hazard constraint" in which bonuses large enough to produce the efficient incentive effect are prohibitively expensive for the principal. Potential solutions to this problem-involving penalization or joint ownership-are unavailable in the public sphere. This means that for a large class of control problems in agencies, the principal's self-interest will result in the inefficient use of monitoring and oversight rather than outcome-contingent incentives. Although monitoring is often thought of as resulting from the agent's moral hazard, it can just as reasonably be seen as resulting from the principal's moral hazard.


Related Articles

  • Further Thoughts on Punishment in Organizations. Sims Jr., Henry P. // Academy of Management Review;Jan1980, Vol. 5 Issue 1, p133 

    In this article I supplement the preceding Arvey and Ivancevich discussion by examining punishment research in organizational settings. The review is divided into three categories: (1) cross-sectional psychometric, (2) longitudinal psychometric, and (3) laboratory and field studies. Two major...

  • Don't Forget to Provide Incentives For Your Middle Performers. Ruffolo, Neil // Workforce;Jan2000, Vol. 79 Issue 1, p62 

    Discusses the need to give recognition and incentives to middle performers in a company. Purpose of the strategy.

  • Incentive schemes: FAIR REWARDS. Gray, Lynda // NZ Business;Nov2002, Vol. 16 Issue 10, p24 

    Discusses how a successful incentive payment or reward scheme can encourage the staff of a company to increase their performance. Maintenance of balance between skills of employees and their appropriate remuneration structure; Incentive scheme designed for medical products sales team. INSETS:...

  • Sparking performers earn more.  // Personnel Today;4/1/2003, p43 

    No abstract available.

  • Allowance application: Fact vs. fiction. Schroer, Bob // IIE Solutions;Oct97, Vol. 29 Issue 10, p18 

    Opinion. Presents the author's view in considering both personal fatigue and delay (PFD) and incentive allowances. Information about PFD and incentive allowances; Standard practice of allowance application.

  • Alternative rewards. Dalton, Glenn // Industrial Management;Sep/Oct98, Vol. 40 Issue 5, p24 

    Deals with the use of employee reward systems to boost productivity and quality. Benefits of alternative reward systems; Factors needed for a successful group incentive plan; How to have a good working relationship within the company.

  • VOUCHER CULTURE. Brown, Bill // Marketing Week;7/13/2000, Vol. 23 Issue 24, p49 

    Focuses on the popularity of paper vouchers given as rewards for clients and employees. Support for the voucher industry by electronic commerce; Provision of simplicity, diversity and a memorable experience to the recipient; View of vouchers as extension of the brands behind it.

  • Suggestions welcome...  // Management Today;Sep96, p12 

    Cites how some British firms reward money-saving ideas from employees. Forms of reward and recognition; Virgin Atlantic; Reed Personnel Services; British Telecom; Boots Contract Manufacturing.

  • QUESTION TIME. Reed, Tim // BRW;7/9/2009, Vol. 31 Issue 27, p40 

    The article provides an answer to a question on the impact of the modernisation of the Australian Industrial Relations Commission's awards system.


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics