In the year late 2009, South Korean citizens were shocked by government's announcement. The government announced that they would privatize a nation owned airport, Incheon National Airport.' They claimed that the public enterprise had to be further advanced in technology and management, and was planning to sell the 49% share of the airport to foreign enterprise. The background information about the Korea at that time was this: government lacked fund due to a nationwide project called 'Four major rivers project.' (I would not go deep into the project itself at this post. You can find it on wikipedia.org by typing four major rivers project.) Even though 49.9% of the citizens disagreed on implementing the project due to several reasons, such as environmental issues, the funding and the project time, and so on. However, the government proceeded anyways. The project cost around 22 trillion dollars (if the estimate of the Korean won was converted to US dollars) and the government had to make up some money in order to keep the country rolling.
Majority of the Korean citizens weren't able to understand the government's decision when they claimed that the airport 'will learn the most advanced techniques' from the world's leading enterprise. Incheon national airport was #1 in rankings of Airport Service Quality inspected by Airport Council International. Besides, according to the Incheon airport customs, the airport was making around $9 billion profit in year 2009.
The decision of privatizing a public entity is usually made when that public entity is lacking in performance. Since the deficit of a public entity is filled up by the tax of the taxpayers, or citizens, privatizing a public entity who does not improve in performance would be a good choice for the company to survive in the jungle according to 'survival of the fittest.'
However, the Incheon airport was making a worthwhile profit, and the authority figures of other renowned airports were actually visiting the Incheon airport to learn the techniques and management methods. So the government funding issues were brought into attention by the people. However, our three-legged principle agent model starts here.
Who will take the airport if privatized? What's behind all this?: Suspicious acts of government and the Macquarie group.
**From this point and further, nothing is proved to be true. The facts are only up to an extent, and rest will be my assumptions based on my personal thoughts and viewpoints.**
Another shock came to the people of Korea when further details came into attention by the internet. Macquarie group, who were the closest to buying most of the shares released by the government, had some personal relationships with the president at that time.There were 3 close people who had personal relationships with the president in the Macquarie group Korea, including the nephew of the president who was CEO of the Macquarie IMM.
So the government here is the agent, and the citizens are the principle, who elects the president and the government officials to represent their thoughts to run the country. It is a little bit off the context, but we can see the people related to the president as the third leg, or the customer of the lawyer in the prompt.
The government officials who are elected by voting should serve the citizens who made them be in their spot. However, the u-bar of the agents, or the government officials, are much too big to just sniff and back away. As this information was released on the web, (the newspapers were controlled by the government, thus was unable to report these information. actually, the web was not a sufficient place for gathering information related to this either; most of the information related to Macquarie group at that time on the web was deleted after 5 minutes they were uploaded on the web) people were furious about the not-even-verified fact that the president was using his power and the asymmetrical information that the people gave him to use it for the management of the country.
The situation, however, is not similar to those of ordinary bilateral, or three-legged principal agent situations. People are a part of the country, which the president runs. This means that people does not really have too much authority over the agent that they have hired. The only way to stop the president from running wild is to impeach the president, which is not really an ideal method. Plus, not all people are too interested in the politics. There are a portion of people who are negligent of what is going on with the governmental policies. In other words, compared to our normal principal-agent model, the principal has too less methods to control the agent.
Of course, the situation doesn't see eye to eye between the principle and the agent. The principle does not really care as long as the performance of the agent is in the right path. However, the agent's u-bar, which is the alternative choice that he could take instead of keeping the oath that he made when elected is just too big. If he had done the privatization, and one of the 'hidden action' underlying was due to that u-bar, he would have lost all the trust that he had achieved during his life. And in this case, the principle and the customer of the agent would not want to meet eye to eye. The method that the citizen can use to control the agent would be an mindset of 'we are the owner of the country.' (I hate to say this, but fact is fact; to be honest, Korean's mindset of citizenship is not too high, compared to other countries who are in similar level of economic/social development and welfare.)
This matter, I personally think, is a little bit away from the prompt. However, government officials-laypeople relationship has been one of the most emphasized principle-agent relationships, and the thing just came up into my mind while I was thinking about the prompt. In order to make the input, which is the vote, into output, people would have to have more interest in the politics and have a better mindset as a citizen of a country.
Of course, the situation doesn't see eye to eye between the principle and the agent. The principle does not really care as long as the performance of the agent is in the right path. However, the agent's u-bar, which is the alternative choice that he could take instead of keeping the oath that he made when elected is just too big. If he had done the privatization, and one of the 'hidden action' underlying was due to that u-bar, he would have lost all the trust that he had achieved during his life. And in this case, the principle and the customer of the agent would not want to meet eye to eye. The method that the citizen can use to control the agent would be an mindset of 'we are the owner of the country.' (I hate to say this, but fact is fact; to be honest, Korean's mindset of citizenship is not too high, compared to other countries who are in similar level of economic/social development and welfare.)
This matter, I personally think, is a little bit away from the prompt. However, government officials-laypeople relationship has been one of the most emphasized principle-agent relationships, and the thing just came up into my mind while I was thinking about the prompt. In order to make the input, which is the vote, into output, people would have to have more interest in the politics and have a better mindset as a citizen of a country.
Let me first remark about your closing paragraph and how you should go about treating a post like this. You agree it doesn't match the prompt. You must decide whether it ties into course themes or not. If you can find a good tie into course themes, then you should write a paragraph about that up front, so I as a read understand where this is coming from. If it doesn't tie into course themes as far as you can tell, but it is something interesting to you, that's fine. You can write it and ask for my opinion on it. But then you should produce something else that is closer in spirit to the topic for this week.
ReplyDeleteFrom my point of view this looks like an interesting political economy issue but really is not about the economics of organizations at all. It is not a good modeling approach to treat a national government like it is a single agent. It is true the the government should act on behalf of its citizens. But treating the government like a single decision maker means you are ignoring all the issues that political science is concerned with. It doesn't make much sense (modeling wise) to do that.
Further from how you told the story, it sounds like government itself was divided and made a controversial decision - the Four major rivers project. It then needed to finance that, which created a chain reaction of sorts.
The second part of your piece, I was say is more about corruption or nepotism than it is about the triangle model. (In Illinois we know a thing or two about corrupt government officials.) Most people would treat the triangle model as one thing and corruption as another. They bear similarities, but different in degree. At the university, for example, each staff member has to complete a conflict of commitment problem to avoid compromising the university work with some outside interest whom they are under contract to. But even lacking a conflict of interest, there can be an internal triangle between me, students in our class, and the Econ department. That is quite possible and isn't a conflict of commitment.
So it is clear you are interested in this situation. But it is far from clear that it really ties into what the class is discussing.
Thank you professor Arvan for the comment. My thoughts about the citizen-government relationship and the principle-agent relationship were too shallow, thus failing to connect the class topic with my prompt.
DeleteMy focus on my topic was the government's (government officials who were elected by the citizens, to be specific) obligation to represent the thought of the citizens who are actually the 'owner' of the country. However, as you have commented on my post, I underestimated, or actually was not even able to think about the importance of the political science concepts underlying in the government's decision making process. I really felt that my thoughts were too shallow even though I was trying to study as much as I can for this topic.
So, here is my question: Would there be any way to relate this subject to the class topic? As I have mentioned above, I thought this topic in the point of the government's most fundamental obligation, which is representing the people who elected him as the government official. I understand that the underlying political science aspect of the decision making process is important. However, economist use the economic models to simply the understanding for complex economic concepts. Would this be too much to simply the matter to the most basic principle-agent relationship? If so, would there be any other way to relate this topic into what we have talked in the class? This is a topic a lot of Koreans are interested in, since problems like this is quite normal in Korean political and economical atmosphere. I would like to further my understandings with this matter according to our class topics.
Another question would be the relationship between corruption and the principle-agent model being described as 'similar, but differing in degree.' I got this feeling that the corruption is a much broader term compared to our 'triangle model' of our interest while reading your comment on my post. Are you describing the corruption as embracing the aspect of the principle-agent situation as a part of it? And how would the 'difference in degree' part would be explained? What is the criteria of 'difference in degree?' I'm quite dazzled about the second part of the explanation that you have proposed to me.
Although this topic is not too much related to our topic, I think I am having much more thoughts than I should have had compared to when I write the topic of my second choice. Instead of feeling bad about failing to respond to the topic clearly, I feel much better by making a clear distinction of the topics that I was not understanding too well. I would like to sincerely thank you again for your thoughtful comments, professor Arvan. And I would really appreciate if I can get some answers back for my comments. I think I would ask you after class for your detailed thoughts about the matters to understand the distinction of these topics more thoroughly.