List of Abbreviations
List of Figures
2. The Principal-Agent-Theory
2.1. Main Assumptions
2.2. Core Problems
2.3. Agency Costs
3. German local governments by means of the Kommunalselbstverwaltungsgesetz
3.1. Structure and content of the KSVG
3.2. Supervision of local authorities in the Saarland
4. The KSVG and the Principal-Agent-Theory
4.1. Core problems of the KSVG in terms of the Principal-Agent-Theory
4.2. Existent solutions for the core problems in the KSVG
5. Outstanding Issues and Conclusion
illustration not visible in this excerpt
Figure 1: Two main Principal-Agent-relationships intended in the KSVG (Authors design)
Figure 2: The third Principal-Agent-relationships intended in the KSVG (Authors design)
Figure 3: Principal-Agent-relationship between citizen and committee (Authors design)
Figure 4: Principal-Agent-relationships during accounting control (Authors design)
The Saarland, as one of the federal states of Germany, has a changeful history between the two powers of Germany and France which also can be seen in its law history. Until 1935 having the German local government code it was under military rule after World War II until 1947. After that they looked towards French law but stopped that way in 1951. After long discussion, the Landtag of the Saarland decided in 1964 a law which should regulate local governance: the Kommunalselbstverwaltungsgesetz. With this law an important step had been done: the local governments were able to organize themselves on their own responsibility. Today, 52 local governments can be found in the Saarland and all govern themselves by means of this law.
The problem assessed in this work is the question if committees in German local governments, in this case in Saarland local governments, have relevance for the local governments under special consideration of the Principal-Agent-Theory.
First of all the author tries to find out if there are any relationships regarding a Principal- Agent-Theory in local governments as this theory is usually used in business environments. The next objective is to illustrate the local government system of the Saarland and to show where one can find committees in this area. The last objective is to find out if the Principal-Agent-Theory can be adapted to the above mentioned law for local governments and points out the role of the committee. In a conclusion the author tries to answer the question asked in the problem definition.
The assignment is mainly literature based in the theoretical part. The author mainly refers to statements concerning basics of the Principal-Agent-Theory made by Jost and the remarks concerning the theory in a governmental environment made by Müller-Osten. The second part concerning the Kommunalselbstverwaltungsgesetz is based on the law itself, flanked by some numbers derived from the Internet. The last part is mainly based upon the author’s opinion and derived from the first two parts. Here, theory will be adapted to practice. At the end, the author will form a conclusion by presenting some outstanding issues.
According to Demougin and Jost the Principal-Agent-Theory´s (PAT) main aim is to explain the efficient design of contracts between a principal and an agent with the help of the emerging costs (2001, p. 45). If two parties try to find out what the optimal contract looks like, the main assumption is that the principal party does not get all the information it needs for free and also not fully exhaustive. Demougin and Jost claim in this context that in general the agent is better informed than the principal, which is the fact the principal has to consider while negotiating with the agent (2001, p. 45). Müller-Osten starts one step earlier explaining the PAT by mentioning that it consists of three components: the principal, the agent and their state of dependence, which is also called contract (2007, p. 145). She also sees the contract as the main aspect in the PAT. But she also mentions that the classical PAT assumptions are deduced from a business perspective which we can not use for this work as it deals with public administration. Therefore she goes one step further and tries to adapt the PAT with its classical assumptions to a public administration situation. She mentions here that each principal is also an agent and vice versa (2007, p. 147). Furthermore, she uses Hobbes assumptions of a contract theoretical explanation by having a look at a simple state model. In this model the state ruler, as the principal, orders the subject, as an agent, to work hard to get more tax income. To help the agent with this task he offers law and order. Müller-Osten now looks at this contract from the PAT view (2007, p. 153). In this case, the population is the principal and orders the state ruler as an agent to install law and order and give him the right to collect taxes. In this case both sides win: The ruler gets money and the population can live in peace and security (2007, p. 148). Therefore one should keep the following message in mind for the further readings: In our civil society and democracy “the principals are the citizens, the sovereign is the agent” (Müller-Osten 2007, p. 149). We will work with this assumption in the further studies.
Having the last words in mind it is furthermore necessary to mention the contract problems within the PAT. Müller-Osten lists here the problems prior to the conclusion of a contract and after it (2007, p. 153). The first problem is called an adverse selection or hidden characteristics; the second one is called moral hazard or hidden action and information. Both are in my opinion relevant for the understanding of the PATs adaption to local committees, so that they should be explained here.
Adverse selection means that the principal can not know the quality of the agent or rather his performance (2007, p. 153). At this time the citizen as principal knows what he wants, but he has low to no information about the agent. The characteristics of the agent are hidden, so the citizens have the problem that they could possibly elect the wrong agents (as we will see in chapter 3.1 for the election of the local councils and the mayors). The candidates in politics in general will try to hide their weaknesses to convince as much as possible citizens to elect them.
Moral hazard is a problem if the principal has knowledge about the performance of the agent e.g. the local council but if he can not observe its activities. If the principal can observe the activities but has no possibility to assess the actions, we call it hidden information (Müller-Osten 2007, p. 154). In the case of hidden action the principal sees the outcome but can not say if the agent was the decisive person for this result.
Agency costs occur if both parties, principal and agent, try to solve the core problems mentioned before (Müller-Osten 2007, p. 155). They are divided in costs for the principal, costs for the agent and residual costs rooted in the always imperfect contracts. The principal has to shoulder such costs which are intended to increase the performance of the agent. In this case the risk of an adverse selection should be minimized and the moral hazard problem could be decreased. Müller-Osten calls these costs control costs (2007, p. 156). The costs for the agent are costs to inform the principal that he is the right guy for the task and reduce the problem of a moral hazard. Müller-Osten mentions here that the so called bonding costs which are the costs for the guarantees the agent made before, are the most expensive ones for the citizen as principal. The costs for the agent are here called self control costs (2007, p. 156). The last mentioned costs can be called residual loss because it is usually not possible to create a perfect contract (Müller-Osten 2007, p. 157).
Concluding the first part of this assignment one should keep in mind that the PAT deals with the contract between parties. The relationship has always some problems which are mainly based upon information asymmetries. These problems can be solved by reducing the asymmetries which cause agency costs. We will come back to these core points in chapter 4 when we adapt the PAT to the following local governance law in the federal state of Saarland.
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