Principal Agent Theory

Principal Agent Theory

How Theory Effects Practice

Capella University

Michael Oliveri

3387 Patch Lane

Tracy, CA 95377

Introduction

The notion of the perfect public administration theory continues to elude academics and public administration officials. In the early twentieth century, writers proposed principal agent theory as a means to raise the efficiency and effectiveness of government service. Appleby (1945) discusses that government service is different due to the virtue that the activities of the administrator are subject to public scrutiny and review. There have been a number of studies and scholarly works devoted to the subject of principal agent theory; however, no consensus or agreement exists amongst theorists. Principal agent theory is valuable when outlining an effective relationship between parties; however, the theories’ deficiencies, practically and economically, render the theory tenuous at best.

This paper will identify principal agent theory and evaluate its applicability to public administration. The utility of the theory will then be discussed relative to a case where an employee of a private contractor exposed significant shirking from military housing contracts. In addition, an evaluation of principal agent theory for its applicability to the field of public administration is discussed. Lastly, principal agent theory will be applied to the administration of a municipal fire department and how perhaps a modified principal agent theory may be more appropriate to government administration. Theorists proposed principal agent theory as a means to emphasize “structural constraints on leadership” (Poth, 2009). These structural constraints take many forms including the principals’ requirement to operate within specified boundaries. For example, the principal may be required to solicit goods or services at a low cost. This requirement may prevent the administrator (principal) from choosing the most cost effective good or...