Research On A Principal-Agent Model With The Organizational Structure

Current principal-agent theory investigates how the principal designs an incentive contract or mechanism in a fixed organizational structure by observing some signals related to the agent’s actions. The incentive contract or mechanism is used to guide the agent’s actions in accordance with the principal’s will. However, in reality, the principal-agent relationship always exists in complex organizations with division of labor among functions and multiple hierarchical structures. In complex organizations, agents always work in different departments, and the division of labor among functions and the departments setting have endogenously determined the directions of agents’ actions, which make the signals of agents’actions difficult to evaluate. More than one agent in the same organization may drift off the principal’s objective due to the division of labor set by the organizational structure, and there is likely to be an internal friction among these agents. Therefore, it is impossible to solve the principal-agent problem in a complex organization only with incentive contract. Especially when the external surroundings change, the principal-agent issue will be more serious. At that time, the issue cannot be tackled by designing an incentive contract, but only by the transformation of organizational structure to re-organize the principal-agent relationship. But the transformation of organizational structure in reality must be related to the interest rearrangement of different agents, and it lags behind the change of external surroundings. Thus, it is not enough to tackle principal-agent issue only by the incentive contract design, but the transformation of organizational structure. The principal-agent relationship should be changed with the transformation of organizational structure in order to bring into better balance the division and collaboration relationship between various functional departments.This dissertation introduces the organizational structure into the principal-agent model, and with a thorough literature review, the dissertation includes the organizational structure as an endogenous variable in the principal-agent model of two agents, to illustrate the relationship among organizational structure, agents’ performances and organizational product. Conclusions are as follows. With the intensity of the incentive unchanged, the output of the organization can increase by changing the organizational structure and facilitating the coordination of different agents’ efforts. Especially when the metering costs of each agent are prohibitive, a transformation of the organizational structure, with one organizational structure superseded by another and one measurement superseded by another, can reduce the internal metering costs of an organization and increase the efficiency.This model offers a new theoretical perspective to analyze China’s railway transport organizational structure from three different levels:institution of government departments, organizational structure in the railway industry, and railway firm’s internal organization. Based on the results of the theoretical model and China’s railway transport organizational structure analysis, this paper also gives some policy insights.With regard to the organization of transportation administration in State Council level, in the market economy, the organizational structure that transportation is managed by different ministries according transportation modes can reduce the resource allocation efficiency and raise the transportation costs. In contrast, the Super-Ministry System, integrated railway, road, waterway and aviation management into one ministry, is beneficial for a balanced development of different transportation modes and a better match between them. The Super-Ministry System can also encourage the objectives of different transportation management departments to be accordance with the objective of the principal.As to the reform of China’s railway transport industrial organization, the proposal of railway vertical separation is not valid both in theory and in practice. This proposal can cause the divergence between the objective of the network company and the one of the transport company. When the rail network company becomes an independent firm, it will pay great attention to its financial situation and profit and reduce the maintenance costs, leading to a worse quality of network and an increase of train operation security risk. And this will ultimately undermine the overall performance of the rail industry. The examples of railway reform in foreign countries can be the proofs of this argument.For the railway transport companies, one type of organizational structure emphasizes specialized management, and sets different depots according to different specialized profession. This structure suffers from an overstaffed organization and overlapping functions, and different specialized staff have some difficulty in working together. The other type of organizational structure emphasizes mutual collaboration and cooperation, set up branch companies according to different geographic region. This structure facilitates the teamwork among different specialized agents, and ensures the objectives of the principal and the agents are the same. The performance of China Railway and Shuohuang Railway offers evidence of this idea.The research enriches the current principal-agent theory, introducing organizational structure as an exogenous variable into the principal-agent model is helpful for examining the relationship between the principal and the agents, and the relationship between different agents, and their actions. In the meantime, the research results of this dissertation offers an insight into and an explanation for China’s railway reform.