An Agency-Theoretic Analysis of the State

3 August 2006 at 11:25 pm Peter G. Klein 2 comments

| Peter Klein |

Tim Swanson recommends this series by Michael Rozeff, “The State as an Organization” (part 1, part 2, part 3). Rozeff is a Rochester-trained financial economist (currently Louis M. Jacobs Chair of Financial Planning and Control at the University at Buffalo) and not surprisingly, his analysis is an agency-theoretic one. The main point is that the mechanisms that mitigate agency problems in firms — competition in the product market, the market for corporate control, discipline from suppliers of capital, the market for managers, etc. — are largely absent in governments. Writes Rozeff:

States are organizations whose composition, aims and methods depend on the institutions the society uses to control agency costs. The classical liberal vision was of a contractual state cleverly arranged so as to keep agency costs low. The ideal contractual state is an organization that, like a corporation, is owned by its principals, who are the citizens. Commissioned by them, the state’s aims are to dispense law and justice which includes protecting the resources or property of its owners. . . .

With weaker controls over agency costs, we observe instead varieties of the predatory state. Here the state moves toward becoming an autonomous organization, more like a company owned and operated by one person or a small group of persons but without outside stockholders. Its residual claimants are its members. They are the owners. Citizens do not own the predatory state. They are the prey.

Entry filed under: - Klein -, Classical Liberalism, Institutions, Recommended Reading, Theory of the Firm.

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2 Comments Add your own

1. Jung-Chin Shen | 4 August 2006 at 12:23 pm

Thanks for brining my attention to the links. I am currently working on a similar topic. I am trying to bring the political sociology account of state, such as Evans, Skocpol, and Wade, into the field of international business. Their distinction between predatory states and developmental state seems related to Meir Kohn’s territorial government and associational government that Richard Langlois mentioned above. But, of course, Evans and his colleagues’ empirical context is to compare Latin American and African countries with four tigers–the four outliers almost appeared in any regression on economic growth over the period 1950 – 1990.
2. Michael Imhof | 15 July 2010 at 6:38 pm

Hi there,

Could anybody recommend some sources of information on urban economics, or more specifically on the ability of cities to attract firms?

Thanks,
Michael