When you hire someone to do a job for you, that arrangement is likely to work best if the two of you have the same goals. Or if your goals differ but are compatible, things are likely to work out pretty well, too. But if your goals are incompatible, then you’ve got a problem – a principal-agent problem.
In a recent analysis (abstract only) of political campaign consulting as an industry, Matt Grossman identifies just such a situation.
Consider how political consultants are compensated. The most common arrangement is for their pay to be based on the amount of service they provide to the campaign (producing and purchasing television or radio ads, carrying out direct mail campaigns, conducting surveys, and so on), as indicated by their total expenditures. Another common arrangement is a flat fee: a firm agrees to perform certain services for an amount that’s agreed-upon in advance. Somewhat less common, but still widespread, is a victory bonus, which can be added on to either of the first two arrangements. Finally, consultants might agree to be paid only if their candidate wins – a contingent-fee structure like that often used by personal-injury attorneys; that’s a rare arrangement for, in Grossman’s words, “consultants are not willing to bet the firm on a win guarantee.”
It is heavy reliance on the first arrangement – tying consulting fees to expenditures – that produces the potential principal-agent problem. If consultants were compensated according to the same logic that holds for candidates (only winning produces the desired payoff), the goals of the candidate and the consultants would be identical or at least compatible. But contingency fee arrangements, as just noted, are rare. As Grossman puts it, “Candidates get a job only by winning the most votes whereas consultants generate more revenue primarily by having their client spend the most money on their campaign.”
bq. Consultants appear to have two sets of incentives associated with their revenue streams. First, they have a direct economic interest in having candidates spend money, especially on television [which is extremely costly]. This may come at the expense of direct mail, Internet campaigning, and GOTV drives. Second, since expenditures are likely tied to contributions, consultants also have an incentive to see that more money is raised. Rather than save money early in a campaign, consultants may be better off spending it and hoping that their candidates can raise more later.
This point shouldn’t be overstated. Grossman notes that consultants have to be concerned about their reputation, and if their actions generate suspicion that they are motivated primarily by a desire to pile up huge fees for themselves, their future revenues and the viability of their firm may suffer. Still, the economic incentive structure does open a potential conflict of interest between principal and agents.
bq. Consultants are often implicated in the worst public complaints about modern campaigns. Their answer is typically to suggest that they work in their candidate’s interest, implementing what works. If business incentives create a division in client and consulting firm interests, however, we need to subject that claim to scrutiny.
Political consultants are often depicted as puppet masters who deftly manipulate the strings that enable candidates to dance to a particular tune. Grossman’s research, by emphasizing the possibility that the tune may be one that suits the puppet master’s interests more than the puppet’s, amounts to a call for further research on the business side of political campaigns and the difference it makes.