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Agenda setting power and moral hazard in principal‐agent relationships: Evidence from hospital budgeting in Norway
Author(s) -
HAGEN TERJE P.
Publication year - 1997
Publication title -
european journal of political research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.267
H-Index - 95
eISSN - 1475-6765
pISSN - 0304-4130
DOI - 10.1111/j.1475-6765.1997.tb01167.x
Subject(s) - moral hazard , principal (computer security) , principal–agent problem , economics , production (economics) , neglect , exploit , business , public economics , microeconomics , finance , incentive , computer science , corporate governance , computer security , medicine , nursing
. The article addresses a public sector principal‐agent relationship under a financial regime of block grants. Two types of questions arise in principal‐agent relations in this setting. The first is whether a public sector agent can force the principal to approve budgets that are away from the principal's ideal point, or if it is the principal that is the strong party in the relationship and can determine the agent's budget. The second is whether the agent can exploit a situation of asymmetric information or neglect from the principal, to lower efficiency. Predictions from different assumptions of the principal‐agent relationship are empirically tested on data from counties and county run hospitals in Norway. Results show that counties have the upper hand in the relationship and can set hospital budgets. However, agents reduce efficiency when budgets are increased and counties can not prevent efficiency from falling by monitoring the agent. Under a block grant financing system counties face a tradeoff between cost‐efficiency and production. Low budgets lead to high efficiency and low production. High budgets lead to low efficiency and high production.