Principle-Agent Model


As I move along with my education, I see more and more examples of how models, while completely necessary are often times far from perfect. This is a perfect example of that. It is important to simplify things but then to be able to rationalize them in the real world. While I don’t think that I’ve ever participated in a “triangle like arrangement”, I think that I have witnessed plenty of these situations in my lifetime.
The example that I will focus on today will be about the chef that my fraternity hired when I was a freshman. He was an agent of both the members of the fraternity and the company that she was hired through, Campus Culinary Solutions (CCC). There were many issued that ended up arising because the members of our fraternity did not see good performance in the same way that the company did. To us, good performance was three good meals a day. It was also always preferable if the meals were tasty and edible (sometimes this wasn’t the case). We also expected there to be enough foods for seconds, and we always preferred that there was a fruit or a salad so that we could stay healthy.
On the other hand, Campus Culinary Solutions was all about cost effectiveness. They wanted to do the absolute bare minimum where we would not turn around and hire another service. My fraternity was quite low budget, so in turn the service that we hired was very low end. They knew that we really couldn’t afford to turn around and hire a new service, so they took advantage of that fact. They would serve us the most bland, basic and unhealthy meals. Everything was fried and there was little to no flavor in anything. They also did the bare minimum when it came to portion. They would make exactly enough to feed each member that lived in one serving, even though we ate much, much more. While this makes sense on their end, the two principles did not see eye to eye on the food quality issue. The agent (chef) probably had it the worst because she was in a lose-lose situation. She was a wonderful woman, so we knew that she felt terrible about the quality of food that she was serving us, but she couldn’t do anything about it. We were all very understanding and no one was upset with her, we just knew we were in a bad situation.

There was really no way to resolve this in practice because the agent was only given the supplies that CCC gave her each week. The only way to solve this would be through getting a principle to replace CCC. The only way that we could have resolved this would have been paying more for our food service, in turn getting us higher quality ingredients and more ingredients. The lack of funds was the only issue. The agent absolutely failed the fraternity side of the principle because she was satisfying the CCC side of the principle. That was really the only way she could go, it would have been nearly impossible to fail CCC and give us more/better food. She failed the only way she could.

Comments

  1. Professor ArvanNovember 25, 2019 at 2:45 PM

    Principal-agent, not principle-agent. (I made a point of this distinction in class, though you weren't present during that session. I know that scolding doesn't normally work for learning, but this one you should know.)

    "He was an agent of both the members of the fraternity and the company that she was hired through, Campus Culinary Solutions (CCC)." (This is not scolding. I'm guessing the chef was not hermaphrodite and that there was a typo in this sentence somewhere. But the prospect that there wasn't a typo had me puzzling)

    Now, onto the example you gave. I'm wondering if the model is at fault or your interpretation is lacking. Of course your fraternity members preferred high quality meals, and you did a good job of saying what that was. But high quality meals are costly. Did the fraternity really expect to get high quality meals at a low price? You might have elaborated on that and whether there were other choices the fraternity might have made as a food supplier.

    To help answer that question, you might have asked older members of the fraternity what the food was like the year before. Did they hire CCC then as well? Or was there a different solution for food service then? Likewise, what happened in this regard your sophomore year? Did you take your meals at the fraternity then?

    I'm under the impression that most first-year students use University Supplies Food Service. So I didn't understand the story on that dimension as well. Maybe you could clarify.

    In any event, if the chef cooked the food but CCC purchased what was to be cooked, then how could the chef make the fraternity members satisfied? If that wasn't feasible, then this is not a good example of the triangle. In a good example, the agent has some discretion. It didn't look like that was true here.

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    Replies
    1. Michael Jensen Econ 490 Fall 2019December 4, 2019 at 3:35 PM

      I apologize for my grammatical errors, my mistake. I think I meant more that the average member did not know how much the food service was being paid, so they expected high quality meals because they were paying high dues. I was in the house the year before and we had private contractor cook our food. He was able to cook higher quality because we cut out the middle-man.

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