Triangle Model


The standard principal-agent model is bilateral, yet it is usually a triangle in the reality, indicating that agent needs to deal with 2 different principals. In principal-agent model, the agent is contracted to manage the principal’s asset instead of the principal. There can be conflict between principal and agent since agent can have their own objectives instead of principal’s, agents can get benefit from asymmetrical information, and agent can avoid their responsibility and work less than one’s capacity or ability. So, there is agency cost to resolve or prevent the conflict between them.

From my experiences, I have not yet encountered in triangle like arrangement. However, I have seen my sister dealt with two different principals. She works as administrative officer/accountant in private international school in China. At the school, there are several international departments such as Korean department where my sister works, English department, and US department. Each department has different goals for students upon graduation. For English and US department, the classes are taught in English and students’ goal is to enter college in England or United States. For Korean department, students are taught in both Korean and Chinese, and their goal is to enter college in China. And, those departments are under the head principal of the private school. My sister has two principals: (the head principal &) the head director of Korean department and students’ parents.

There is somewhat competition among different departments on students’ performances in the school to gain the reputation and fame of the department and recognition from the head principal to get more support. My sister’s goal is to maintain the students’ good performances with reduced budget to make both principals satisfied. In her perspective, it can be more important for her to be recognized by the head director of Korean department since she is the one who directly hired her to work for. At the same time, she has to make students’ parents satisfied to have students in the school. It is very common and easy for Korean students from private international school in China to transfer to other private schools, so it is important for her not to disappoint students and their parents regarding their education in school. One of the tensions among principals can be about extra-curricular activities. Parents want their children to experience various activities even with expensive activity cost (that is already covered in the expensive tuition in parents’ perspective), while the head director doesn’t want to spend additional budget in extra-curricular activities. The head director would prefer the extra-curricular that can be done within already prepared resources, such as playing instruments or sports in school property and rather spend the budget in educational courses to increase their academic performance to get recognized by the head principal of school and further the fame of the department.

When both principals don’t carefully monitor what counts for good performance by my sister, she tends to support students’ both academic and nonacademic life since she loves her students at school, which can be favoring either head director or parents. She believes that if the students are satisfied with the financial and emotional support regarding education from school, they will remain in school which can be beneficial not only for their parents but also for head director in the long run. For example, some students wanted to learn fly the drone and some wanted to make quite professional videos for their activities. Drone class requires a professional to teach students and also various expensive equipment. And, students wanted to get active camera which is also expensive to buy. However, she supported students’ desire to learn with over-budget in extra-curricular activities.

With her action, she failed in satisfying one master in the short-term since she used more financial asset of the head director. Fortunately, the head director was also satisfied with the use of the budget later on because the rate of transferring students had decreased after actively supporting students’ desire to try different extra-curricular activities. However, it is not common to satisfy both principal at the same time. If my sister didn’t have any passion on her job or the love for students, she could have acted based on her self-interest, not considering the well-being and well-educating of students. In that case, the principals would have costed more on agency cost to monitor the agent’s action. And, if the agent ignores one principal and just succeed on satisfying the other principal, the agent will not be trusted and more tensions will arise in the future. I believe it is important for agent to act for ethical primary goal for oneself and for principals.

Comments

  1. Professor ArvanNovember 25, 2019 at 3:29 PM

    One way to think of the triangle in theory, not in practice, is to imagine that the two principals negotiate with one another about what the agent should do. Might they be able to come to some agreement about that? Or will they forever have differing views on the appropriate activities of the agent? If they can come to an agreement and if the agent senses that, it clearly serves as a target for the agent to achieve. If they can't come to an agreement, however, then I'm afraid that the agent must choose one or the other.

    In the examples you gave, about the drone and the videos, I wonder if either principal anticipated the specifics, but only responded on generalities. My sense of how you told this story is that these were areas that other schools haven't yet figured out as well. So for your sister, there was a related issue of staying ahead of the curve. In general, such a situation can create an unhealthy competition among the schools, in that they increase their costs to attract students, but the revenues aren't there to sustain that. In the short run, however, as you suggested, the students are less likely to transfer to another school when their current program does take the more costly approach. This is one where the answer may change over time, as the market catches up to the situation.

    So congratulations to your sister for navigating this situation well. But maybe the answer will be different a year or two into the future, when these approaches have less novelty.

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    Replies
    1. Lawrence Klein Econ 490 fall 2019December 3, 2019 at 6:52 AM

      I would like to believe that if the two principals have a common goal and ethics, they will be able to negotiate with one another about what the agent should do. Then, the agent will not have a hard time figuring which one should the one mainly serve for or make satisfied with one's work.

      I also think that such a situation can create an unhealthy competition among the schools. What I thought was that purchasing drones and active camera for students were considered one-time purchase, yet the cost of hiring professionals are not. I suspect that the situation will change in the future. But, I hope that, in the future, students will be able to develop their skills or work on projects by themselves after learning basic concepts or skills from the hired professionals so that the school don't have to hire the professionals as often as they do right now.

      And, thank you for congratulating my sister for a successful negotiation. I hope she keeps successfully negotiating between the principals in the future as well, preventing unhealthy competition among private schools.

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