Agency theory

Agency theory provides a framework for analysing social relationships involving at least two parties where one party expects another to scrutinize their performance (Eisenhardt, 1989). The relationship requires one party (the agent) to give an account of his work to another party (the principal). See Figure 1: Principal Agent Theory

Figure 1: Principal Agent Theory

The principal could be a stakeholder demanding accounts from the public sector manager (the agent). In a public sector context, the principal could be the public sector manager demanding accounts from a consultant (the agent), or, to go further, the stakeholder demanding accounts from the manager (See Figure 2: public agency) following a chain of principal-agent relations (Bovens, 2007).

Figure 2: public agency

Agency theory addresses problems of different goals and of different attitudes to risk (Eisenhardt, 1989). The theory assumes information asymmetry between agent and principal. The unit of analysis is the contract between agent and principal so emphasises the relationship (Fincham, 2002). Agency theory can show relationships in a complex system that involves stakeholder ‘hands’ and ‘eyes’ in a public context.

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Bovens, M. (2007) 'Analysing and Assessing Accountability: A Conceptual Framework', European Law Journal, 13 (4), pp. 447-468. 408
Eisenhardt, K. M. (1989) 'Agency Theory: An Assessment and Review', The Academy of Management Review, 14 (1), pp. 57-74. 520
Fincham, R. (2002) 'The Agent's Agent', International Studies of Management & Organization, 32 (4), pp. 67-86. 500