Agency costs are allegedly incurred because we are all motivated by egoism (a
basic assumption in rational decision making), so we desire to act in our own
interest. Hence an agent such as a legislator (or judge) may act in their own
interest rather than according to the wishes of their constituents. To the extent
that this happens - legislators act in their own interest rather than in the public
interest -
individual choices are not incorporated into the social choice made
by legislation, or are incorporated only in a distorted way.
926
In the simple case legislators act entirely out of their own personal interest.
However, their incurring of agency costs may involve other parties. Legislators
may be swayed from adherence to constituents’ interests or wishes because
the rich and powerful, by threats, favours, influence or bribes, have caused
them to pass legislation favourable to their interests. There is tendency for this
to happen in countries where electoral advertising is conducted on commercial
television on the basis that each party or candidate has to pay their own cost.
Legislators who desire re-election need money to pay for electoral advertising
so they have a strong incentive to do what campaign contributors, present or
future, want done.
927
One way in which the interest groups that become campaign contributors can
convey their wishes to legislators is through lobbying. Consequently, a
political system that houses active and powerful lobbyists is prone to agency
costs because lobbyists can convey, in forceful terms, the wishes of their
masters. An illustration of the adverse effects of lobbying comes from the
frequent support that Governments give to ailing industries in the domestic
economy. Baldwin and Robert-Nicoud explain how this often happens.
928
Policy is influenced by pressure groups that incur lobbying expenses, their aim
being to create protection. Economically this generates rents (that is, payment
to a factor of production above what is necessary to procure it, the amount
needed to procure it being called its transfer earnings). As an industry
expands, competition increases and erodes rents. But in a declining industry
other firms will be reluctant to enter because costs of entry and establishment
become sunk or unrecoverable costs. Except where the gains from rent are
high enough to compensate for this, entrants to a field are deterred. Thus
___________________
926
Wawro (2001), however, casts an interesting light on this question. Based
on a study of “legislative entrepreneurship” Wawro does not see legislators as
acting solely in their self interest of re-election. They are also, according to his
study, motivated to enact good public policy by their desire to advance to some
prestigious position. In other words, ambition for high office is also part of their
driving force.
927
For discussion of the corruptive aspects of lobbying see, for example,
Girling (1997).
928
Baldwin and Robert-Nicoud (2002)
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