Triangular Principal-agent Model

Most of time, the tension between the agent and principal results from goal incongruence. The same reason causes problems in a triangle like principal-agent situation. Take my work experience two years ago in Colorado as an example, I was a crew leader who had to satisfy both my supervisors and my crew members. As I mentioned in the previous post, I attended the summer work and travel program and worked in a housekeeping department for three months. My job was to lead crew members to finish tasks that supervisors assigned. In that situation, my supervisors can be considered as the principal 1, and my crew members are considered as the principal 2.

The principal 1’s goal is to finish cleaning cabins or lodge rooms as more as possible in the shortest time, and I am the agent who is supposed to help them finishing the goal. The principal 2’s goal is quite opposite to the principal 1’s goal, since most of housekeepers are international students who joined the program for fun and they wanted to spend more time experiencing American culture. In other words, the principle 2 wants to put the minimum effort in the job. I, unfortunately, am the agent that principle 2 interacts with. The principal 2 hopes that I can do whatever I can do to make their work easier and more joyful, for example, don’t rush my crew to finish tasks and give my crew more break time. It is obviously that two principals’ goals are contradict

Fail to satisfy either principal may cause unpleasant outcomes. Let’s say, the principal 1 could judge me as a lousy leader and never ask me to be a crew leader; the principal 2 could deem me as a over-demanding crew leader and have less motivation to work for me. What the principal 2 could do is a scenario mentioned by Akerlof and Rachel (2005) in their paper “Identity and the Economics of Organizations”: if the manager supervises workers strictly, workers may take it as a signal that their manager is acting against workers’ welfare. Therefore, workers may be unwilling to perform higher effort in the job. The best way to make both principals happy is to maintain the work efficient and don’t push crew members too far.

One of advantage of being an agent working between two principals is that I have better understanding on both principals. In Economics terms, I have more information than either principal. Since the principal 1 does not directly interact with the principal 2, what the principal 2 wants does not completely revealed to the principal 1, vice versa. On the contrary, I interact with two principals and know exactly what their goals are. With good application of this information advantage, I can easily make results better than what principals expected. For example, I get the cleaning schedule, the principal 1 expects our team to finish the work on schedule and the principal 2 expects me to give them reasonable break time. The official break time is an hour per day, half hour for lunch and half hour in the afternoon, but I tell my crew members that if they finish cleaning before the schedule, I’ll give them the rest of time to take a break. In fact, I am not that generous, I only give them half of the time that rest. Still, my crews (the principal 2) are pleased and have motivation to work harder in return for longer break time. Let’s say, my crew finishes the job 30 minutes before the schedule, which means the principal 2 gets 15 minutes more break time. Then, I report to the principal 1 that we finish our job 15 minutes ahead the schedule and the principal 1 is pleased as well. With some manipulations on asymmetric information, I can make results seem brilliant for the principal 1 and the principal 2. I become not only an efficient crew leader who finishes jobs ahead the schedule, but also a warm-hearted leader who is willing to give my crew more break time.

Aside from using the information advantage, there are some other ways to minimize the tension. Such as goal congruence for the agent and principals. However, to make the agent and principals to fight for a same goal is much harder than just manipulate information. It takes long time to communicate and find out what outcome makes all people happy. For instance, supervisors (the principal 1) of the housekeeping department has never thought of holding a conference to tell crew leaders (the agent) and other housekeepers (the principal 2) what goals they want to achieve. Neither do the supervisors care about what crew leaders and housekeepers want. Since the process of understanding each other is more time-consuming and more difficult. Worse situations could happen when there is no information advantage that can be manipulate properly, or when all efforts fail to achieve goal congruence. The consequence may likely be the breach of contract, since neither principals and the agent are satisfied with each other.

Comments

  1. Professor ArvanDecember 2, 2017 at 1:54 PM

    I thought the way you managed the break time was pretty clever. However, I must say, I still don't understand this arrangement. It seems like is based on a false pretense - the international students have different expectations till they actually have to work the job. Given that, I wonder if you could talk through what would happen if one of them tried to quit. Likewise, I wonder if the principal 2's were at all frightened about losing their job. Understanding those issues would help in getting me to understand the situation more fully.

    Let me talk about the issue more generally. Middle managers (and really everyone with administrative responsibility in a hierarchy except the CEO) has a dual principal problem of the type you describe. The issue may come through more with budgeting than with the day-to-day operations, depending on where in the hierarchy we are focusing on. But the issue is there in some form all the time. In the worst case scenario, the principal 2's go behind the agent's back and directly contact the principal 1's. When that happens, it is not good. The agent has lost control then. In the best scenario, the agent maintains buffers of some sort (you used break time for this) and spends the buffer on an as needed basis to smooth out the bumps. (In the budgeting case, the buffer might be the agent's discretionary budget.) Buffers are quite important as a way to manage this sort of triangle.

    I'm glad you raised this example, because it leads to a point we should discuss in class on Tuesday.

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  2. Christina RomerDecember 6, 2017 at 9:19 AM

    This comment has been removed by the author.

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  3. Christina RomerDecember 6, 2017 at 9:19 AM

    ^Sorry about that, I had missed finishing a thought of mine before submitting it.

    First off, I appreciate that you utilized information that we learned from our paper / project in your post. One of the coolest things I have found from this class is the way that these concepts connect to my experiences. I think that your utilization of information asymmetry to please both parties was interesting and smart, but I wonder if you have considered the aspects of what would have happened if someone would have approached you about what your timing looked like. For example, if someone would have asked you a specific question about the aforementioned situation, would you be able to explain that the way that you handled it was the best choice. I think that as a leader or manager, sometimes there are difficult decisions to make regarding this balance between parties, which can often lead to questions of loyalty, ethics and opens the door to opportunism. I do believe that you had the best intentions both for yourself and your team members, but I'm wondering if people might have questioned you. Also, I could see there being some concern regarding the potential for opportunistic behavior on the part of the team leader, which would not help either party or principal in terms of future conduct. Thanks for sharing!

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