How to get the most from your agency relationships in | McKinsey
Generally, in a business relationship, the principal and agent relationship requires being either an employee/employer relationship or an ind ependent. Other examples may include hiring a lawyer, consulting a doctor or following the advice of a bank manager. Central to the principal-agent relationship is the. PDF | Communication structures between project owners and project managers are influenced by the principal–agent relationship between the.
The first occurs because the principal cannot evaluate whether the agent lets his own utility function prevail. Secondly, as the productivity of the agent can be measured only by indicators, the principal cannot judge whether the agent acts in the interest of the principal, or just tries to optimise the indicators.
Some examples show where agency issues arise in hospitals, and how information asymmetry plays a role: The relationship between the hospital more specifically the medical specialist and the patient. The patient the principal has a health problem and delegates the problem to the medical specialist the agent.
Principal agent relationships and the efficiency of hospitals
For the patient, it is hard to judge how well he is treated by the medical specialist. Inside the hospital, the hospital board the principal hires medical specialists agents to treat patients. The hospital board is not as well informed about the quality, efficiency and effectiveness of the treatment as the medical specialist is. Inside the hospital, another principal agent relationship exists, in the relationship between the hospital board the principal and departments, e.
Again the manager of, for example, the radiology department is much better informed about the quality and necessity of performing an X-ray than the hospital management.
Agency Law | Legal Centre for Business & Technology | University of Calgary
In this study, we analyse two of these relationships empirically and use them to explain hospital efficiency. The first concerns the relationship between the hospital and the patient. Second, we analyse the relationship between the hospital management and departmental managers. The third relationship, that between hospital managers and doctors, is not analysed further. Not because this relationship is not interesting—it is very interesting indeed—but because good quality data on the productivity of medical specialists are not available.
Hospital—patient relationship from an agency perspective The relationship between a hospital and a patient can be described within a typical principal agent framework. The patient has to rely on the specialised knowledge of the doctor and there is an asymmetry in information about the treatment of the health problem.
It is difficult for the patient to measure the performance of the hospital. The hospital might thereby prefer to optimise its own utility function, minimising costs as is mostly assumed in efficiency studies. This may come at the cost of the utility of the patient, who has an interest in receiving high quality care. The reasoning of Newhouse [ 25 ] is in line with this assumed relationship.
He states that differences in efficiency might be attributed completely to differences in unobserved quality.
- Principal agent relationships and the efficiency of hospitals
- Agency Law
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Many other studies have emphasised the need to include quality measures in efficiency studies. Jacobs and Dawson [ 15 ], for example, criticise current methods of efficiency measurement in hospitals, because quality measures are not taken into account. This latter study [ 15 ] and others e.
Fizel and Nunninkhoven [ 12 ] argue that an increase in the quality of health care is likely to require additional inputs per unit of output, thereby implying lower relative efficiency for higher quality providers.
In contrast with the criticism of frontier studies that differences in inefficiency may simply reflect quality differences, studies that are more management- and organisation-orientated, argue that quality and efficiency complement each other. Porter and Olmsted Teisberg [ 26 ], for example, state that: From the hospital point of view, this is suboptimal.
Hospitals that do not optimise follow a more integrative approach where the hospital is organised toward the client focussed factories.
In this approach, quality and efficiency problems are solved simultaneously. This reasoning finds its origin in target engineering, where quality and price preferences form the starting point in engineering services, products and production systems.
Specifically, you trust that you and a contractor have the same set of incentives.
A conflict in incentives leads to the principal-agent problem, a common phenomenon studied in microeconomics. The Principal-Agent Relationship A principal-agent relationship is an arrangement between two or more individuals. Specifically, the agent of the relationship performs a task on behalf of the principal.
The Definition of Principal Vs. Agent
This is often due to different degrees of knowledge and skills. For example, if you hire out a contractor to fix your roof, you are the principal while the roofer is the agent. You do not have the skills to carry out roof repair, so you hire someone who has. Other examples may include hiring a lawyer, consulting a doctor or following the advice of a bank manager.
Central to the principal-agent relationship is the concept of trust. By hiring a contractor to fix your roof, you trust that he will provide the best service in his capacity. The roofer, on the other hand, is confident that you will pay him once the job is complete. Introducing Utility In economics, utility is the satisfaction individuals receive from consuming goods and services. Everyone experiences some level of utility from consuming a certain good, and the difference between people's utility is a result of different preferences.
While economists measure utility, it is difficult assigning a value as preferences are qualitative, not quantitative. In other words, there is no "ruler" for measuring utility.