The vast federal bureaucracy is the machine that makes the US government work. A theory from economics, known as the principal-agent problem, can help explain the issues associated with bureaucratic control and how those tend to get managed in the modern era.
The executive branch of the United States government is involved in implementing and executing policies. However, it’s important to remember that in our bureaucracy, the Congress passes the laws that form the basis for the policies executed in the executive branch.
A Principal-Agent Problem in Bureaucracy
To understand the dilemmas that bureaucratic agents face in their roles as policy implementers and regulators, we need to understand a theory from economics known as the principal-agent problem.
A principal-agent problem describes a control problem that occurs in hierarchical relationships.
The problem arises when one person, an agent, is entrusted to act on behalf of another person, a principal. The principal is a person who provides instructions, resources, and who has authority over some area. The principal may provide resources or training, and may set goals, limits, or guidelines for the agents. The agent is the person who enacts the instructions from the principal.
The classic principal-agent problem arises because principals and agents may have competing goals or may operate from different sets of information. And principals typically cannot provide constant monitoring of agents’ actions.
In bureaucratic politics, we tend to think of two types of principal-agent problems: adverse selection and moral hazard.
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In an adverse selection situation, the principal has more information than the agent during the process where the two are trying to come to agreement on something.
A good illustration can be in health insurance. Consider that a person seeking insurance is the principal. This principal is seeking an agent to provide coverage for health care. But the agent does not typically know the health status of the principal. If the principal is healthy, the agent may seek to offer a low-cost package, but if the principal is ill, the agent is better off charging more. The agent has insufficient information and the principal has no incentive to share that information.
In this sense, there is an information asymmetry problem between the principal and agent. This may lead to principals adversely selecting agents because the two are not operating from the same set of information.
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In a moral hazard situation, there is asymmetric information after a deal is made. When principals and agents are already tied through some contract or organizational arrangement, agents may be more willing to take risks with their implementations knowing that principals are forced to pay the costs.
Think of this like being really rough on a transmission of a rental car. As the agent, or car rental customer, you know you will not pay the costs of damage to a transmission—damage that is likely to be imperceptible upon visual inspection when returning a rental car.
The principal, or car rental company, will pay the costs of repair and include the costs as a diffuse part of the overall pricing for renting cars. The agent has an advantage in this situation, knowing that they can engage in bad behavior and not suffer consequences.
Principal-Agent Dilemmas in the Federal Bureaucracy
In the context of the federal government, there are many principal-agent dilemmas. Most of these occur because managers, or principals, cannot fully monitor their staff, or agents, and the staff tend to have much more detailed information compared to managers.
The US Congress is the principal of the federal bureaucracy, its agent. Bureaucratic agents are motivated by winning larger shares of the federal budget, which Congress controls, and receiving greater authority for addressing topics in the agency’s jurisdiction.
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Reducing Information Asymmetry
There are several tools that the Congress has for reducing its information asymmetry problem with the bureaucracy.
The Congress provides instructions through laws, and resources through appropriations. It exerts control over the professional civil service by regulating hiring, salaries, and so forth.
The Congress can mandate that agencies report back to it about how money was spent or how laws were implemented. Congress can conduct oversight hearings to investigate implementations. Congress can require that inspectors general, within agencies, conduct inspections or audits of agencies. And Congress can conduct its own inspections and audits through the Government Accountability Office.
Bureaucratic Agents and Congress
So how do bureaucratic agents tend to respond to the instructions from Congress? One of the primary tools used by regulatory agencies is the creation of federal rules.
A federal agency seeking to implement some law from Congress will typically propose a series of rules to work out the nitty-gritty of implementing the law. Proposed rules are open for public comment and available on a website maintained by the federal government known as the Federal Register.
In the end, because of a lack of complete bureaucratic control, sometimes things go awry. Congress is not able to constantly police the federal bureaucracy, and so it relies on an ad-hoc system, sometimes referred to as ‘fire alarms’ to keep its eyes on agency implementation.
In this situation, bureaucratic agents, or those who interact with them, might bring violations of law to the Congress’s attention. When this happens, it is called ‘whistleblowing’.
A whistleblower is someone, usually a federal agent or bureaucrat of some kind, who alerts Congress to violations of law that the agent has witnessed or has evidence of, and laws are in place to protect whistleblowers from punitive blowback from their bosses.
As a whole, the federal bureaucracy works pretty well. It may be slow, or even ineffectual at times, but a veritable army of highly skilled civil servants run the day-to-day machinery of government.
Common Questions about Challenges in the Federal Bureaucracy
A principal-agent problem arises when one person, an agent, is entrusted to act on behalf of another person, a principal. The classic principal-agent problem arises because principals and agents may have competing goals or may operate from different sets of information.
In bureaucratic politics, there are two types of principal-agent problems: adverse selection and moral hazard.
A whistleblower is someone, usually a federal agent or bureaucrat of some kind, who alerts the Congress to violations of law that the agent has witnessed or has evidence of.