Principals and Agents

The theme of accountability is present in two important debates in Washington this week. On the international front, there are serious questions of how to deal with the lack of political progress in Iraq as Ambassador Crocker and General Petraeus testify before Congress. Likewise, in domestic policy, there's the equally serious question of how to deal with failing schools, as reauthorization of the No Child Left Behind Act (NCLB) of 2001 is debated in the Senate.

While these two issues are worlds apart in scope, the basic problem is the same. In economics, it's known as the principal-agent problem. Rather than looking at how individuals respond to the incentives of market prices, principal-agent theory looks at how "principals" (governments, employers, parents) can set up a system of incentives to encourage specific behavior from "agents" (citizens, workers, children).

Suppose you ran the U.S. government. You'd like to achieve academic success for students at home and real political progress for the Iraqi government. However, you cannot do these things alone: you can only provide incentives for students and teachers on the one hand, and for Iraqi leaders on the other.

So you set "benchmarks." For example, let's focus on the school scenario. The basic strategy of NCLB is that if a certain percentage of students at a school don't pass a standardized test, most of the teachers will be fired and replaced with new ones. This is meant to give teachers an additional incentive to make sure that all their pupils are learning.

The really difficult part comes when benchmarks are not met: when a school fails to meet the standards laid out by NCLB, or when the Iraqi government fails to reach the benchmarks set by the American government. What do you do then? Do you really follow through on your threat? What if you really believe that the teachers were working hard, or that the Iraqis just needed a little more time?

Discussion Questions

1. Think of a situation from your own life in which you wanted someone to do something and were in a position to provide them with incentives to do it. What incentives did you use? Did they work? Did the person do what you wanted?

2. Recent research by Derek Neal and Diane Whitmore Schanzenbach of the University of Chicago suggests that No Child Left Behind has an unintended consequence: "...the design of NCLB almost guarantees that the most academically disadvantaged children will not benefit from its implementation and may actually be harmed." Read the summary of their research. Do their results imply that NCLB should be rescinded? How might it be changed to provide better incentives?

3. Consider the problem of addiction. The main object of rehab and groups like Alcoholics Anonymous is to provide a system of incentives to break someone of addiction. But suppose someone returns to their addiction. What should be done then? Is there a strategic value to lenience when someone doesn't meet a benchmark?