Asymmetric information can have a big impact on government performance and regards the principal-agent problem that can be found in political matters. Agency problems can be distinguished in two categories: hidden information and hidden action. Asymmetric information belongs to the hidden information category and describes the case where agents have more information than the principals.
The extent of the impact of asymmetric information on government performance depends among others on the type of government and actions taken by government leaders to avoid it. Usually single-party governments are less affected by asymmetric information, whereas multi-party coalitions are more affected by asymmetric information and carry greater principal-agent problems. Agency theory problems cause the decline of government performance as well as disabling the government from achieving high targets and goals it may have set.
Agency Theory and the Principal-Agent relationship:
Agency theory talks about the situation where agents act on behalf of the principals. Principals delegate certain tasks to agents for various reasons. In politics, governments big or small use delegation to increase the range of services that they can provide. For example, governments delegate to defense ministries the task of sustaining national security and to finance ministries the task of controlling the economy. According to Strom (2000:266) the reason we delegate in political matters is because one party (the agent) has certain kinds of information or skills or simply the time that the other party (the principal) lacks. The principal-agent relationship, however, carries some drawbacks. If the agent has interests and incentives that are not perfectly compatible with those of the principal, then delegation may generate agency problems.
Agency problems can become worse in the case of hidden information / asymmetric information- where the agent has more information than the principal – or hidden action – where principals cannot fully observe the actions of their agents. Hidden information can lead to adverse selection (principals systematically select wrong agents), whereas hidden action can lead to moral hazard (agents have incentives to take unobservable action contrary to the interest of the principal). In order to prevent agency losses, principals engage in various forms of oversight of their agents. There are four major measures for doing this: 1) contract design, 2) screening and selection mechanisms, 3) monitoring and reporting requirements and 4) institutional checks (Strom, 2001:270-271).
According to Dewan and Myatt (2008:1) “at a basic level, performance depends upon the qualities of the ministers who form the executive and the actions they take during their time in office: we might expect high performance whenever talented individuals use their skills to pursue the collective goals of the government, rather than their private ambitions”. In order to resolve the problem of improving performance, high talented individuals must be called to serve in office. (Dewan and Myatt, 2008:1).
Apart from pure talent ministers require incentives in order to perform well and not to pursue their own goals. This is the role of the government leader where he must try to eliminate the agency problem, containing issues such as asymmetric information and hidden action. Incentives may include performance-related pay and the ability of the leader to hire/fire ministers, which ministers fear. Dewan and Myatt (2008:18) argue that “a government is effective when ministers devote all of their available talent to the task of running government, and ineffective when they do not” (Dewan and Myatt, 2008:23). Government stability and duration are also indicators of government performance. A more extensive study of asymmetric information problems will be conducted for Parliamentary form of governments.
Delegation and accountability in Parliamentary democracies:
In Parliamentary democracy, the principal is the Parliament whereas the agent is the Prime Minister and his/her cabinet. Parliamentarism democracy in its ideal form is a chain of delegation and accountability, from the voters to the ultimate policy makers (i.e. Voters delegate to Parliament which delegates to Prime Minister, PM delegates to Ministers and so on). It features a single chain of command, in which at each link a single principal delegates to one and only one agent, and where each agent is accountable to one and only one principal.
This is the singularity principle that distinguishes Parliamentarism from other constitutional designs such as the US Presidentialism. Oversight under Parliamentary democracy in order to eliminate asymmetric information and hidden action problems is usually very costly and the principal wants to maximize its efficiency relative to its cost. The instruments it takes to control agent behavior differ from those of Presidential systems. Four features of Parliamentary democracy are particularly important: (1) Compared to Presidentialism, Parliamentary democracy implies more indirect delegation and accountability, (2) less reliance on competing agents, (3) less reliance on institutional checks and (4) heavy reliance on ex ante control mechanisms, especially prior screening, e.g. in the recruitment of cabinet members.
The main problem is not that Parliamentary systems lack the opportunity to sanction, but rather that they do not have monitoring capacity necessary to determine when such sanctions might be appropriate. The most important reason that Parliamentarism tends in the direction of screening lies in the greater prominence of political parties. Under Parliamentary democracy, parties control delegation from voters to representatives, as well as from representatives to the chief executive (Strom, 1995:261-89). In Parliamentary democracy agency problems are greater as many parties participate in the decision-making where each of them trying to safeguard their own interests.
Asymmetric information in single-party and multi-party governments:
According to Thies (2001:580) “government requires delegation”. In majority party situations, where the majority party forms the government by itself, delegation to cabinet ministers is naturally intraparty delegation. On the other hand, in multiparty coalitions, delegation must cross the party lines. This means that parliamentary supporters of a coalition must agree to delegate not only to their party representatives but to the coalition partners as well. However, they cannot control ministers from the other parties, only those from their party (Thies, 2001:580). Asymmetric information problems exist in the form that some parties may have different and/or more information than the other coalition parties. This eliminates the performance of their governance in total as one party may pursue its own interest instead of the interest of the government.
This is reinforced by Tsebelis (1995) who argues that multiparty governments sometimes are not able to overcome interparty problems of delegation, which might force them to do less while they are in office than single-party governments (Tsebelis 1995). Axelrod (1970) argues that this might as well explain why coalitions containing parties with similar policy preferences are more likely to be formed and to survive longer than coalitions comprised parties with divergent preferences (Axelrod, 1970). Thus, asymmetric information problems are less likely to occur in coalitions formed by parties with similar preferences, and are more likely to survive longer and perform better.
According to Thies (2001:581) those who delegate, do so in order to divide labor, to accomplish more at once, as well as to take advantage of the expertise of agents. Because of the complexity of modern government, elected politicians delegate to bureaucratic agents more extensively. The risks of delegation increase as complexity increases (Lowi 1979; McCubbins 1985; Bawn 1995). Delegation risks can be divided into two main categories: 1) expert agents have knowledge unavailable to those delegating and much of what the agents do can be hidden from principals, 2) agents might have different goals than the principals and because of the authority delegated to them, they have the ability to pursue their own goals. The first risk relates to asymmetric information, as agents often have more information that the principals cannot easily obtain or understand. Hidden action is also possible to exist.
According to Thies (2001:582) “multiparty governments face greater delegation problems than single-party governments for at least two reasons: divergence of preferences and difficulty of sanctions. For instance, in a single-party government because the ministers come from one party, it is more likely that they have less divergent policy preferences than in the case of multi-party government. A minister from a single-party government is likely to prefer a policy that is similar to his party’s preferences as they come from the same party (Thies, 2001:582). Thus, asymmetric information problems and different preferences are less likely to occur.
Moreover, delegation to individuals is easier to be controlled within single-party governments as rewards and sanctions can be executed within the party system. A minister with divergent preferences from his party is likely to be threatened with “reduction in campaign support, denial of the official party endorsement, or a lower position on the party list, among other punishments” (Thies, 2001:382). In the case of multi-party governments, a minister who may have divergent preferences from the rest of the cabinet faces less danger, as he may be promoting the goals and wishes of his party instead the government’s goals.
Martin and Vanberg (2004:13) argue that parliaments play a central role in allowing multi-party governments to solve intracoalition conflicts. They also argue that these individuals will possibly attempt to pursue policies that are preferred by their party at the expense of the other coalition members, thus undermining government’s overall performance.
Asymmetric information derives from the principal-agency theory and describes the fact that agents usually have more information than principals do. This can have adverse consequences and harm the performance of the government in overall. The extent of these adverse consequences often depends on the type of government and the actions that government leaders take in order to avoid it. As we have seen, single-party governments are less affected by asymmetric information problems, while multi-party coalition governments are more affected by this problem.
As it was examined above, agency theory problems, such as hidden action and especially hidden and asymmetric information lead to the decline of government performance and prevent the government from achieving high targets. In order to eliminate agency theory problems various oversight can be conducted in the form of 1) contract design, 2) screening and selection mechanisms, 3) monitoring and reporting requirements and 4) institutional checks (Strom, 2001:270-271). It is the job of political leaders to work towards the elimination of agency problems and induce agents to work more efficient in order to increase the overall government performance. In order to achieve this, agents should not try to pursue personal or partisan goals; instead they should try to pursue governmental targets and benefits.
Axelrod R. (1970) Conflict of Interest: A theory of divergent goals with applications to politics. Berkeley: University of California Press.
Bawn K. (1995) “Political Control Versus Expertise: Congressional Choices about Administrative Procedures.” AmericanPoliticalScienceReview89: 62- 73.
Dewan T. and Myatt D. (2008) ‘The Declining Talent Pool of Government’, American Journal of Political Science, forthcoming.
Lijphart A. (1999) Patterns of Democracy: Government Formation and Performance in Thirty-Six Countries, chapter 7.
Lowi T. (1979) The End of Liberalism: The Second Republic of the United States. 2nd Edition. New York: Norton.
Martin L. W. and Vanberg G. (2004) ‘Policing the Bargain: Coalition Government and Parliamentary Scrutiny’, American Journal of Political Science, 48 (1), 13 – 27.
Mathew D. McCubbins (1985) “The Legislative Design of Regulatory Structure.” American Journal of Political Science 29:721-748.
Strom K. (1995) ‘Delegation and Accountability in Parliamentary Democracies’ European Journal of Political Research, 37(3), 261-89.
Thies M. (2001) ‘Keeping Tabs on Coalition Partners: The Logic of Delegation in Cabinet Governments’, American Journal of Political Science, 45(3), 580 – 98.
Tsebelis G. (1995) ‘Decision Making in Political Systems: Veto Players in Presidentialism, Parliamentarism, Multicameralism and Multipartism’, British Journal of Political Science, 25 (3), pp. 289-325.