Background: What is meant by “market?” “..a social system in which individuals pursue their own welfare by exchanging things with others whenever trades are mutually beneficial.” Trades make each better off, although trading is not a necessity for either. Source: Deborah Stone, Policy Paradox

Superior- subordinate Examples of exchanges* (transactions, contracts) applied to public organizations citizens Private vendor Elected official Superior- subordinate Agency head Environment Between employees *Many other exchanges possible: exchanges can be either formal or informal; concrete of implied

Markets: Perfect vs. Real Small numbers (limited competition) Information is scarce and costly..and is subject to interpretation Transactions have broader social impacts Unlimited #s of buyers and sellers The availability and objectivity of information Transactions affect only the parties involved

Agency Theory as the basis of Market Metaphor Related Issues: Goal incongruity Information asymmetry Cost of monitoring Shirking Moral hazard Adverse selection Incentive Behavior-based vs. output based control Contract* between principal and agent as the focus of the metaphor Contract can be real or figurative (implied)

What kinds of questions does agency theory raise in analyzing organizations??