Contract Theory in Washington

For the first of my Theories Into Action posts a few weeks ago, I talked about the disconnect I found between motivation and reward power that is typically found in a market economy in which individual actors working in their own best interest undertake various transactions. This week, for my final post, I would like to expand on that idea and concept. After a few more weeks of working in a think-tank economic model that seems to defy the laws of free markets, I believe I have to more insights to share.

Recently, I was part of a conversation with a few of my colleagues that came to a discussion about a sort of official lobbying wing that FDD was setting up and a few employees that were moving there. After hearing them discuss the legal implications and reasons for needing to set up a separate legal entity for FDD’s lobbying efforts, I started thinking about another Washington-specific economic model and profession: the lobbyist. When it came down to it, think-tanks and lobbyists are essentially the same. Both seek to influence public policy and public officials without actually being in the government, only lobbyists do it on behalf of clients and think-tanks do it, ultimately, on behalf of donors. Thus, at the end of the day, lobbyists and think-tanks are no different than your typical plumber or electrician, all subject to the rules of contract theory. Principals pay up front for a job to be done and since they don’t really have any way of verifying the effort that the agent puts into the job they are hired for, there is a problem of moral hazard. This problem is mitigated by increasing the agents pay contingent on success in the task. When applied to our situation, lobbying and think-tanking are simply two forms of the principal-agent problem. Lobbying, notoriously high-paid and brazen, is the intensive effort spurned by high compensation while the think-tank is the lower-effort and lower-cost option.

When framed in this manner, the reward power model based on the free market makes significantly more sense. Both professions offer a service, political influence, but serve vastly different segments of the market catering to the differing needs of customers.

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