Incentive Problems On Choosing The National Investment To Universities

Principal-agent relationships are a kind of normality in modern society. The principal-agent relationships lie between government and universities have been investigated in this paper. As the principal, the government invests to universities, and entrusts them to educate students and do scientific research standing for the benefits of the society. As the agent, universities have some private information. Because of the asymmetric information between government and universities, universities' veritable actions cannot be totally observed. Thus agents may not act for principal's utility. This paper tries to explain the relationships between government and the universities and analyzes how the government chooses the efficient investment to universities. It uses the spirit of incentive mechanism and reputation theory, and extends them to analyze the principal-agent problems with asymmetric information between the government and universities.This paper looks back the classical and the advanced principal-agent theory at first, and then analyses the fundamental position and the important effort. Basing on the front analysis, this paper explains the present situation and principal-agent problems on higher education in our country. And the writer use the reputation theory to establish a simple agent market—reputation model to address the moral hazard problems between the government and universities. We devise an implicit incentive contract and extend the situation from two-stages to T-stages. It is shown that the government can use an effective incentive mechanism to make efficient investments to universities, and universities would choose a positive effort for reputation effects. The results are consistent with the empirical evidences shown in the paper that there is a positive relationship between the reputation of the universities and the investment from the government, which is a feedback effect between them. In the end, we give some possible policy implications to the education investment of the government.