Principal-Agent Theory of Organizations

Theory of interaction between an agent and the principal for whom they act, the point being to structure incentives so that the agent will act to benefit the principal. The principal-agent theory of organizations (“agency theory” from here on) encapsulates the idea that public sector performance can be improved if incentive-based contracts between different actors are implemented. Principals will be more likely to achieve their desired outcomes, while agents will have clarity around work programs and goals. Agency theory has had considerable influence on the theory and practice of public administration and policy since its emergence in the 1970s. It was particularly instrumental in many high-income developed countries through the 1980s and 1990s, with often radical public sector reforms resulting. Its legacy has endured, with many public sector….